Morgan Stanley Calls India's Valuation Decline Cyclical
India's recent decline in market valuations is temporary rather than structural, and a recovery in economic growth could help reverse the trend and provide a boost to equities, according to a report by Morgan Stanley. The investment bank stated that the combination of subdued recent market performance and lower foreign investor ownership could create a favourable environment for Indian equities going forward.
Growth Acceleration Potential to Reverse De-rating
The report explicitly noted, "India's relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse." Morgan Stanley argued that concerns suggesting India's valuation decline is structural are overstated. According to the report, one argument for a structural de-rating is that India's long-term growth could slow because of a declining fertility rate. Another concern is that artificial intelligence (AI) could hurt India's services exports and trade. However, the report said both concerns are exaggerated.
Demographic and AI Concerns Overstated
While fertility rates are slowing, the change has not been abrupt and is likely to support economic growth over the next two decades, even though it may gradually reduce India's long-term demographic advantage. On artificial intelligence, the report said AI could pose a near-term challenge to the country's services export momentum. However, over the medium term, it also presents a significant opportunity to improve labour productivity from India's relatively low productivity base.
Structural Factors Supporting Long-term Growth
Morgan Stanley further said India's long-term growth outlook remains supported by several structural factors, including a multi-polar global economy that could increase India's share in global goods trade, a growing consumer base and a significant pickup in investments. The report therefore concluded that the decline in India's market valuation is mainly cyclical and reflects the gap in relative economic growth compared with the rest of the world.
Growth Gap with Global Economy as Key Trigger
However, the report also shared that although India's economic growth appears to have bottomed out and is now moving higher, it still trails growth in some other economies, particularly those benefiting from the global artificial intelligence capital expenditure cycle. Looking ahead, Morgan Stanley said the key trigger for Indian markets will be how investors assess the growth gap between India and the global economy. The report said market sentiment could improve if optimism around global AI-related capital expenditure moderates or if India's economic growth accelerates further.
Upcoming Earnings Season Could Provide Positive Surprises
Morgan Stanley also expects the upcoming quarterly earnings season to provide important signals for investors and believes companies could deliver positive earnings surprises, supported by strong high-frequency economic indicators.
