Reforms create room for higher foreign allocation to India: Morgan Stanley

Equity strategist says improved hopes on growth may be an opportunity for those who had pared their India bets in recent years

Foreign investors have space to allocate more capital to India relative to the recent past, according to global financial services group Morgan Stanley.

Jonathan F Garner, equity strategist at Morgan Stanley Asia, said recent reforms and improved hopes on growth may be an opportunity for foreign investors who had brought down their India bets in recent years, while speaking at an annual event on Wednesday.

“They have exhibited outflows from a structurally overweight position. They’ve been quite consistent since they peaked in 2014 when people were essentially double-weighted versus the benchmark. So broadly, the emerging market (EM) funds are neutral on India right now. And we think this is a good opportunity for them to revisit…start to rebuild positions,” said Garner.  

He added that China has been the among the best countries for investors within EMs across time periods. This has been driven by its strong earnings growth in dollar terms. India had been a strong second but was affected by a structural slowdown. This is expected to reverse because of reforms and a benign external environment where the price of oil is expected to remain low. This is a positive for India which meets much of its oil needs through imports.

“So that should allow bond yields in India to remain relatively low and we would expect the cyclical pick-up to gain strength. The payoff to some of the structural reforms like goods and services tax, for example, or better environment for inward foreign direct investment should also kick in on the private capital expenditure side,” added Garner.  

The domestic arm of Morgan Stanley Group recently raised its target for the S&P BSE Sensex to 50,000 by December 2021, in its November 15 ‘2021 India Equity Strategy Outlook’ report authored by equity strategist Ridham Desai and equity analyst Sheela Rathi.  This implies an upside of 13.2 per cent from its closing level of 44,180.05 on Wednesday.

“Covid-19 infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months,” stated the report. The duo noted that there had been a 27 per cent derating of India relative to its EM peers over the years on a (price-to-book) basis. 

The ratio looks at how expensive a market or stock is relative to the value of its assets. The push towards reforms could help restore confidence, leading to a rerating, stated the report.

Foreign portfolio investors have been net buyers in Indian equities, purchasing Rs 1.3 trillion worth of shares so far this financial year.