India's Stock Correction To Reverse Soon, But FII Flows Not The Trigger: Morgan Stanley

India's recent underperformance could reverse in the coming months, but unlike popular commentary, the recovery will not be led by inflows from global funds, according to Morgan Stanley.

Most market participants await a turn in foreign institutional flows, strategists at Morgan Stanley said. "But what will move share prices up is an inflexion in the confidence on growth, not flows."

Global funds ownership of Indian equities has fallen to multi-year lows, while domestic flows continue to remain strong backed by rising allocation by households into equities, the brokerage said in a note.

Benchmark indices — Nifty 50 and the Sensex — have fallen 12.3% and 11.4%, respectively, from the previous peak. During the same period, the small and mid-cap indices fell as much as 19.4% and 16.3%, respectively.

Flows hardly predict prices, and they are net zero because every buyer has a seller. "What matters for share prices is liquidity, not flows and, for sure, liquidity is not the same as flows," Morgan Stanley said. And, the source of liquidity is "confidence in growth and macro stability," the brokerage added.

The budget was a strong push for growth with rising capex and falling subsidy expenditure plus a slower pace of fiscal consolidation than the previous 12 months, it said.

The RBI has pivoted policy with a rate cut, commitment to liquidity and a foot off the regulatory overburden on the financial sector. Credit growth is likely to turn from here, which in turn should support an acceleration in growth, Morgan Stanley said.

If global cues do not surprise negatively, India should resume its outperformance to emerging markets in the coming months. Morgan Stanley said private sector financials is the best way to play the recovery along with discretionary consumption and select industrials.