Morgan Stanley upgrades India to standout overweight citing earnings growth

The Wall Street major Morgan Stanley has upgraded India to "standout overweight" citing that the relative economic and earnings growth is improving and the macro-stability setup looks sufficient to withstand the higher real rate environment.

"India remains standout overweight. We increase our overweight stance on Indian equities and as our most-preferred emerging market," the brokerage said in a note on Friday.

The "dream" run of domestic flows continues and multipolar world dynamics are driving both FDI as well as portfolio flows towards the country, it said.

Not just that domestic equities tops the brokerage's global equity investment score with an overall score of 68.

Singapore though is at the second highest score is a distant 54, Greece at 47, Mexico at 43 and Poland at 38, making the top five markets for the company this year.

India has been structurally outperforming MSCI EM index by 45.5 per cent (in USD terms) from early 2021 until October 2022, and "we expect outperformance to continue, with India starting to show a material breakout in relative EPS versus EM and having relatively low correlation/revenue from both the US and China," it said.

Recent high-frequency trends also support our bullish stance with inflation concerns abating and the trade balance improving, it said, adding that other than India only Japan has an overweight stance in Asia.

"We remain structurally bullish on India with the key thesis of our market upgrade intact.

"Our India economics team's recent tracker shows projects under implementation have recorded broad-based growth and PMI manufacturing remains in the expansionary zone since July 2021, likely driven by strong domestic demand amid a broad external weakness," the report said.

Moreover, the previous concerns of a higher inflation causing abrupt changes in monetary policies have somewhat abated after September CPI moderated to 5 per cent and core CPI slowed further to 4.6 per cent. Trade deficit has also narrowed with service trade balance improving sequentially in September.

From an average return in dollar terms India has been historically outperformed on average during EM bear markets, to the tune of almost 8 percent each year since 1997, the report said.