Global brokerage house Morgan Stanley has upgraded India's rating to overweight from equal weight on the back of reduced valuation premium and the resilient economy. The brokerage fees that India is at the start of a 'long wave boom'. This comes four months after the firm upgraded India’s outlook to equal-weight from underweight on March 31.
India is ranked #1 in our framework, improving from #6 in our last review, highlighted the brokerage. With this upgrade, India is now the top-ranked, most-preferred market among emerging markets (EMs), it said, adding that relative valuations have become less extreme compared to last October, contributing to this meteoric rise.
Morgan Stanley analysts said, “We see a secular trend towards sustained superior earnings per share (EPS) growth versus EM over the cycle,”, adding that a young demographic profile is supporting equity inflows.
The brokerage reiterated its incremental bullish stance on India in the mid-year outlook given constructive fundamentals and narrower valuation premiums to EM. India now becomes our core OW market in the Asia-Pacific region. Valuation premiums to EM and China have moderated significantly from last October's high and started to spike up again. Macro indicators also remain resilient and the economy is on track to achieve a 6.2 percent GDP forecast.
It further stated that there are things that have fundamentally changed in India, including structural reforms, supply-side reforms like corporate tax cuts and production-linked incentive (PLI) schemes, and regulation and formalisation of the economy.
Sensex target, sectors and stocks
MS expects the BSE Sensex to reach 68,500 points by December. It said Sensex will trade at a price-to-earnings multiple of 20.5 times compared to a 25-year average of 20 times. The premium over the historical average reflects greater confidence in medium-term growth, noted the brokerage
Morgan Stanley’s target for Sensex is based on multiple factors, such as the absence of major upward movements in commodity prices, the US escaping a recession, and the Reserve Bank of India maintaining a pause in its repo rate hikes.
The brokerage is also overweight on industrials, financials, and consumer discretionary stocks. It expects these sectors to be major beneficiaries of India's ongoing structural growth story.
In its Asia-Pacific Ex-Japan focus list, Morgan Stanley has added Larsen & Toubro and Maruti Suzuki but removed Titan. Both Larsen & Toubro and Maruti Suzuki have also been included in the GEM (Global Emerging Markets) focus list.
Maruti Suzuki is set to benefit from a higher per-capita income in India as well as market share expansion and improving product mix whereas Larsen & Toubro is a beneficiary of the Indian and broader EM capex cycle, which it sees as the best-in-class implementation of our India Industrials upgrade.
Despite the positive outlook, Morgan Stanley warned that unexpected inflation surges and changes in monetary policies could have adverse effects, particularly if productivity improvements do not keep pace. Moreover, the potential disruptive impact of artificial intelligence on India's services exports and the labor force is also something to track closely, it added.
China and other countries
Meanwhile, Morgan Stanley also cut its rating on Chinese stocks to equal weight as growth and valuation concerns remain. It said that investors should capitalise on a rally spurred by government stimulus pledges to take profits.
"MSCI China is now within 7 percent of our target of 70 and has delivered 9 percent total returns since December 4, in line with MSCI EM. The market moves down to #13 in our framework, given still-negative earnings revisions and weak ROE and profit margins vs. history, which undercut cheap valuations. The July Politburo meeting signalled policy easing, but key issues including LGFV debt, the property and labour markets and the geopolitical situation need to improve significantly, in our view,," it explained.
The brokerage believes that returning India to an overweight rating and downgrading China to equal weight is warranted.
"Manufacturing and services PMIs have rallied consistently since the end of Covid restrictions in contrast to the rapid fade seen in China. As well, real estate transaction volumes and construction have broken out to the upside. Moreover, India's ability to leverage multipolar world dynamics is a significant advantage. It is a member of the Quad political framework with the US, Australia and Japan. It is benefitting from a surge in inward FDI, including from US, Taiwan and Japanese firms looking to its own large domestic market as well as a much-improved export infrastructure situation vis-à-vis more efficient ports, road and electricity supply. Private equity firms are expanding in India (and ASEAN) at the same time as they are struggling with exits in China," it rationaled.
Simply put, India's future looks to a significant extent like China's past. Our economics team thinks trend GDP growth in China is likely to be around 3.9 percent to the end of the decade vs 6.5 percent for India, it said.
Morgan Stanley also upgraded Greece to overweight, meanwhile, maintained its overweight rating on Korea, citing more valuation support. However, it revised MSCI China and Taiwan from overweight to equal-weight and downgraded Australia to underweight citing earnings/valuations risks.