- Morgan Stanley and Jefferies see cyclical bottom and value in Indian large caps now
- Morgan Stanley prefers domestic cyclicals, financials, industrials, and consumer discretionary
- Morgan Stanley views Indian IT as an AI beneficiary despite recent sector struggles
Indian markets have stayed under a prolonged period of stress, logging the worst weekly losing streak in 25 years. Even as bear market indicators loom strong, Morgan Stanley and Jefferies have turned constructive on Indian frontline equities.
The two brokerages are of the view that the recent slump has carved out a cyclical bottom, and has turned large caps attractive with a lucrative risk-reward entry point.
Morgan Stanley strategists, led by Ridham Desai, noted that strong underlying macro and micro fundamentals, coupled with a growth cycle that has bottomed and begun trending higher, should drive share prices in the months ahead. Jefferies also echoes the large-cap preference, arguing that below-average valuations offer strong "hiding places" as bond yields climb.
Morgan Stanley: Backing Domestic Cyclicals, AI Dark Horse
India remains a "defensive growth market", Morgan Stanley stated, arguing that earnings traction will eventually offset the near-term market gloom. The brokerage categorically marked its preference for domestic cyclicals over defensives, noting that export-oriented sectors will capture the inflecting growth cycle.
Sectorally, Morgan Stanley is "overweight" on financials, industrials and consumer discretionary, while it is "underweight" on energy, materials, healthcare and utilities.
A crucial point that emerged from the Morgan Stanley note is that the brokerage sees India's information technology sector as a "dark horse" in the artificial intelligence race. Indian IT stocks, which have struggled over the past year, may emerge as an underestimated beneficiary in the AI race, according to the brokerage. It expects global enterprises to lean heavily on Indian software exporters to deploy enterprise AI applications.
Jefferies: Seeking Shelter In Valuations As Yields Rise
Jefferies strategists led by Mahesh Nandurkar relied on shifting yield dynamics to support their case for large-cap preference. The note pointed that the yield gap between India and the US has narrowed to 20-year lows, alongside a compressed inflation differential. It further pointed out that since India's real policy rates remain positive, any prospective rate tightening will be far shallower than the 2022 cycle.
The brokerage recommends adding Kotak Mahindra Bank and Welspun Corp, while maintaining an "overweight" stance on Reliance Industries Ltd. (RIL). However, it hinted at trimming exposure to rate-sensitive stocks, by cutting down on real estate, non-banking financial companies (NBFCs), and consumer discretionary plays.
Jefferies also unveiled key cutes, trimming portfolio weights in Eicher Motors, Lodha (Macrotech Developers), and Godrej Properties.
Notably, Morgan Stanley and Jefferies diverge slightly on consumer discretionary exposure. However, both the institutional desks converge in their preference for large caps, citing the valuation comfort. The two notes signal at rotating out of overextended mid-and-small caps and interest-rate-sensitive plays into cash-generative, fairly valued large caps, which could be poised to benefit in the next leg of the earnings cycle.
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