Indian stock markets to continue underperforming EM peers: Morgan Stanley

Earlier in November 2022, Morgan Stanley had reiterated its stance on the Indian markets and said that the bull-run remained intact. Back then, they expected the Sensex to hit 80,000 levels by Dec '23

Indian stock markets are likely to continue to underperform emerging market (EM) peers, said analysts at Morgan Stanley led by Ridham Desai, their head of India research and India equity strategist, in a report co-authored with Sheela Rathi and Nayant Parekh. That said, the analysts believe India’s relative fundamentals in terms of earnings growth remains strong.

“We remain underweight India in an EM context given our view on improving conditions for some large EMs such as China, Korea and Taiwan. We believe EMs are benefiting from a relatively more benign world versus 2022, and India’s relative valuations imply that its recent underperformance may continue for a few more weeks,” Morgan Stanley said.

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At the helm of India’s outperformance in 2022, the three analysts said, was government policy, including a structural rise in the domestic equity saving pool, a boost to corporate profit share in gross domestic product (GDP) and a focus on foreign direct investment (FDI) flows, which raised the share of FDI in balance of payments (BoP). 

All these factors, Morgan Stanley believes, allowed India to run monetary policy that is less sensitive to the US Federal Reserve, and reduced the equity market’s sensitivity to US growth conditions and oil prices. 

 

“Not much of that has changed in 2023 and relative valuations, a sore point for India’s relative performance, are also correcting rapidly,” Desai wrote.

Earlier in November 2022, Morgan Stanley had reiterated its stance on the Indian markets and said that the bull-run remained intact. Back then, they expected the S&P BSE Sensex to hit 80,000 levels by December 2023 in their bull-case scenario, to which they had assigned a 30 per cent probability.  READ ABOUT IT HERE

For this, while corporate earnings were projected to compound 25 per cent annually over FY22-25, Morgan Stanley expected India to be included in global bond indices in 2023, which could have resulted in nearly $20 billion of inflows over the subsequent 12 months. As their base case, Morgan Stanley pegged the S&P BSE Sensex at 68,500 levels.

Key catalysts

One of the key catalysts for the markets in the year ahead, according to Desai, will be the general elections scheduled for calendar year 2024 (CY24), which he thinks that the markets will start to ponder over in the second half of CY23. 

 

Interest rate cycle (back home and globally), growth in earnings of India Inc., the impact of China reopening - especially on input prices and energy costs, and the likely increase in the institutional bid on shares are some of the other important factors that will decide the markets' trajectory, the Morgan Stanley note said.

Strong earnings growth going ahead, Morgan Stanley believes, is likely to be driven by improving capex and margins. “Stock returns lead earnings growth and are suggesting over 20 per cent EPS growth in the coming 12 months, similar to our estimates. Our FY24 earnings estimate is 10 per cent ahead of consensus. A key risk is a larger-than-expected slowdown in global growth,” the note said.