Morgan Stanley believes investors are overlooking a major shift in India's growth cycle, arguing that both earnings and market peaks lie ahead.
Reflecting this view, the brokerage has reoriented its portfolio strategy, tilting toward domestic cyclicals over defensives and export-driven sectors, and moving to an overweight position on financials, consumer discretionary, and industrials.
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Morgan Stanley's Sectoral Picks
In line with its 'Gunning for Growth' theme, Morgan Stanley's portfolio strategy is 'overweight' on financials, consumer discretionary, and industrials. On the other hand, the analyst is 'underweight' on energy, materials, utilities, and healthcare.
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The key downside risks to this optimistic view stem from a global growth slowdown and worsening geopolitical conditions. The brokerage argues the growth slowdown experienced in the second half of 2024, coupled with rich relative valuations, is now reversing, setting the stage for India to deliver better relative performance.
The structural changes supporting a higher Price-to-Earnings or P/E multiple include an improved macro stability, a falling intensity of oil in the GDP, and a rising share of services exports. These factors, alongside fiscal consolidation and lower inflation volatility, imply structurally lower real interest rates. The resulting scenario of high growth, low volatility, falling interest rates, and low beta, according to Morgan Stanley, provide a strong fundamental case for a significant market re-rating.
Gunning for Growth
This stance is fuelled by a major shift in macro policy toward growth, including recent rate and cash reserve ratio or CRR cuts, government capital expenditure or capex front-loading, and significant GST rate cuts that are aimed at boosting mass consumption of goods and services.
Morgan Stanley is ahead of the consensus, expecting positive earnings revisions and an additional RBI rate cut within the current quarter. Other key catalysts include potential policy reforms beyond the GST rate cuts, and a possible India-US trade deal that could lower tariffs.
The analyst notes that Foreign Portfolio Investor positioning is at all-time lows, suggesting significant room for inflows once growth recovers.
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