Growing bets on India likely to sustain outperformance, say experts

Morgan Stanley has joined global brokerages CLSA and Nomura in raising India allocations.

Experts say the growing preference for domestic equities could help the Indian bourses fare better than their emerging market (EM) peers.

Since 2021, the MSCI India index has gained 39 per cent even as the MSCI EM index declined 28 per cent. So far in calendar 2023, the India index has gained 7.4 per cent, while MSCI EM is down 2.7 per cent.

“We increase our overweight (OW) stance on Indian equities, as our most-preferred EM market. Relative economic / earnings growth is improving and the macro-stability set up looks sufficient to withstand the higher real rate environment. The dream run of domestic flows continues and multipolar world dynamics are driving both foreign direct investment (FDI) and portfolio flows towards India,” said Morgan Stanley in a note this week.

The US-based brokerage increased India’s weight in the Asia Pacific ex-Japan portfolio from 75 basis points (bps) to 100 bps OW.

Earlier this month, CLSA had said it is 303 bps overweight on domestic markets in MSCI Asia Pacific, ex-Japan portfolio, thanks to the supportive macro outlook. During September-end, Nomura upgraded its stance on the Indian market from ‘neutral’ to ‘overweight’ and recommended a 100 bps higher allocation vis-à-vis India’s weight in the benchmark MSCI Asia ex-Japan index.

Interestingly, these OW stances on India come even as the relative valuation of domestic markets are pricey compared to EM peers.

Experts say Indian markets, although expensive, hold the most promise.

“Interest rates will not come down in the Western world with the Israel-Hamas conflict. The West is already in a slowdown, and China is struggling. No other part of the world other than India will likely demonstrate acceleration in economic growth. The world is left with the only large market where you have a realistic prospect of GDP growth of 6-7 per cent over the next couple of years,” said Saurabh Mukherjea, founder and chief investment officer (CIO), Marcellus Investment Managers.

One of the major reasons for the underperformance of EM peers is the underperformance of China, which has the biggest weight in the MSCI EM and MSCI Asia Pac ex-Japan indices.

Some believe India’s appeal could dim if China gets back on its feet.

“These overweight stances may stabilise, and we may not fall much. If things were to change in China, incremental flows could go over there. A positive stance on India doesn't necessarily mean flows are coming. It’s all about risk on and risk off trade. In the short term, we may fall less,” said Andrew Holland, chief executive officer (CEO) of Avendus Capital Alternate Strategies.

This week, the Nifty Index fell 1.1 per cent, while the MSCI EM index declined 2.2 per cent.

Morgan Stanley believes India’s less global reliance puts it at an advantageous position.

“India has been structurally outperforming MSCI EM from early 2021 until October 2022, and we expect the outperformance to continue. India is starting to show a material breakout in relative earnings versus EMs and has relatively low correlation / revenues from both the US and China,” said equity strategists Daniel Blake and Jonathan Garner in a note.

Besides India, China and South Korea are the two other EMs, which Nomura is overweight on. CLSA has a neutral stance on China and is overweight on South Korea.