Indian Stocks To Outperform EMs In 2025 As Slowdown To Be Short-Lived: Morgan Stanley

Indian stock market will continue to beat its emerging peers in the upcoming year as the recent slowdown is "transient" with more domestic inflows, creating a never-before-seen virtuous cycle, according to Morgan Stanley.

Rich valuations of the domestic stocks are supported by strong terminal growth, the earnings cycle and India's low beta, Ridham Desai and Nayant Parekh, analysts at Morgan Stanley, said in a note.

The slowdown expected in Indian stock's bull run would be transient, according to the brokerage.

The bull market was underpinned by a focus on macro stability sourced in inflation-targeting, fiscal consolidation and the declining oil intensity of the economy, the note said. "This consequent fall in inflation volatility has made growth more predictable, resulting in a fall in India’s equity market beta and a rise in equity valuations."

Fiscal consolidation is creating space for private borrowing and spending to fuel the next leg of earnings growth, analysts in the global brokerage said. And this will "put a lid on inflation and its volatility".

Morgan Stanley sees a structural rise in equity holdings on household balance sheets being supplemented by higher global allocations to India as the country's index weight rises.

These domestic inflows that India has seen bring more reliable supply of risk capital, making way for less volatility in equities and more predictable growth. This is "a virtuous cycle we have never seen in India before", the brokerage said.

The election results in the financial capital put to rest doubts about the government's ability to deliver reforms. Prime Minister Narendra Modi's party-led alliance won the recently concluded state election in Maharashtra.

The domestic stocks saw one of the biggest corrections since the rout seen during Covid-19, as foreign investors pulled out of Indian stocks in record sums. The benchmark gauges—NSE Nifty 50 and BSE Sensex—went past the so-called 'correction zone' and is on a recovering trajectory.

India's current bull market has become the longest in history, Morgan Stanley said in another note. The "ageing" bull market has more potential than widely believed, it said.

Since the lows of Covid-19, the benchmark Nifty 50 has advanced by nearly 245%, while the mid and small caps have surged by 430% and 540%, respectively.

The current rally surpassed the 2003-08 bull market in length, but with only a third of its cumulative return, analysts at Morgan Stanley said. This performance is significantly better relative to emerging markets than all previous bull markets.

Previous bull markets ended at a higher multiple, suggesting room for further growth, it said, adding that it sees substantial upside to return on equity and a longer earnings growth cycle.