Morgan Stanley upgrades India's rating to overweight, downgrades China

The brokerage firm added that it expects Sensex to reach 68,500 by the end of December this year

Morgan Stanley has upgraded India to overweight, four months after it was upgraded to equal weight from underweight on March 31. The brokerage firm believes that the country is just at the start of a long-wave boom, according to a report by CNBC-TV18.

Morgan Stanley, in a note, highlighted that there are things that have changed fundamentally in India. These are due to structural reforms, supply-side reforms like corporate tax cuts and production-linked incentive schemes, and regulation and formalisation of the economy, among other things.  

Morgan Stanley added that it expects Sensex to reach 68,500 by the end of December this year. It will trade at a price-to-earnings multiple of 20.5 times compared to a 25-year average of 20 times. The brokerage also added that the premium over the historical average reflects greater confidence in medium-term growth.

According to the note, the target on the index is based on 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 actions.

It has also upgraded India's industrial sector to overweight. Financials and consumer discretionary stocks are already overweight for the brokerage. It also added Larsen & Toubro and Maruti Suzuki to its Asia-Pacific Ex-Japan focus list.

Cuts China's rating

The brokerage firm on Wednesday also cut its rating on Chinese stocks to equal weight, stating that investors should capitalise on a rally propelled by government stimulus pledges to take profits.

Recently, Chinese assets have gotten a boost amid promises from Beijing to encourage growth and boost the private sector. But the measures are likely to come piecemeal, analysts wrote, which may not be enough for shares to sustain gains.

According to Morgan Stanley, market sentiment is refocusing on China’s structural challenges including local government issues and unemployment, which were still devoid of solutions.