Morgan Stanley downgrades Indian markets, advises partial sell-off

Is the latest global brokerage to either downgrade India or recommend higher allocation to other Asian markets

Morgan Stanley has downgraded domestic equities from ‘overweight’ (OW) to ‘equalweight’ (EW) and recommended taking some money off the table.

“We move tactically EW on India equities after strong relative gains. We expect a structural multi-year earnings recovery, but at 24 times forward   (P/E) we look for some consolidation ahead of Fed tapering, an RBI hike in February and higher energy costs,” Morgan Stanley equity strategist led by Daniel Blake and Jonathan Garner have said in a note on Asia Pacific markets.

The brokerage has upgraded Indonesia to OW, while maintaining an EW stance on China and UW on Taiwan.

Morgan Stanley becomes the latest global brokerage to either downgrade India or recommend higher allocation to other Asian markets.

In the recent past, HSBC, UBS, Nomura and Jefferies have increased weightage to China and other Asian markets, while raising concerns over India's expensive valuations.

Earlier, Morgan Stanley ran a 50 basis points (bps) overweight on the Indian market in the Asia Pacific (ex-Japan) and Emerging Market portfolio. However, India’s outperformance this year vis-à-vis the EM peers has prompted the brokerage to move to a neutral stance.

The Indian markets have rallied 26 per cent in the past six months and outperformed the MSCI EM index by 30 percentage points.

“This strong outperformance is partly due to bullish consensus earnings expectations (+34 per cent YoY EPS growth for 2021 and +18 per cent for 2022) and a favourable reform agenda,” said Morgan Stanley.

“However, while the fundamental leading indicators are positive, we see valuations as increasingly constraining returns over the next 3-6 months, particularly as we head towards Fed tapering, absorbing the impact of higher energy costs and our expectations of a first RBI hike for the cycle in February 2022. Notwithstanding the already-sharply upgraded consensus earnings through 2021, India's 12-month forward P/E ratio has moved to an all-time high of 24.1 times. As a result, India is the most expensive market in our model on EM-relative five-year trailing z-score of P/B and P/E,” it has noted.

Morgan Stanley said it believes the Indian markets might take a breather from here and look for some consolidation.

The benchmark Sensex on Thursday closed at 59,985, down nearly 3 per cent from its peak made last week.