Morgan Stanley sees scope for market re-rating in Indian equities

Inexpensive relative valuations, strong policy stimulus and an emerging growth upcycle could support markets, the brokerage says

Domestic equities are entering a rare sweet spot where weak past returns, inexpensive valuations, strong policy support and subdued foreign investor positioning are aligning to create the conditions for a sustained market re-rating, according to a report by Morgan Stanley.

 

In the note, Ridham Desai, managing director (MD) and chief India equity strategist, has argued that India’s trailing 12-month equity performance is the worst on record, while relative valuations are approaching historical troughs -- setting up what it describes as a potential ‘pain trade’ for under-positioned foreign portfolio investors (FPIs).

 

“Valuations, performance and positioning are all in favour,” the report said, adding that FPI exposure has steadily weakened over the past four years. An undervalued rupee and the prospect of a fresh corporate buyback cycle further strengthen the case.

 

 

Morgan Stanley expects a sharp turnaround in earnings growth over the coming months, driven by a coordinated reflation push from both the Reserve Bank of India and the government. Rate cuts, liquidity infusion, bank deregulation, sustained public capex, tax relief and a relatively expansionary budget are expected to unwind India’s post-Covid hawkish macro stance.

 

Trade agreements and easing tensions with China add to the positive mix, the report said.

 

Morgan Stanley has base-case BSE Sensex target of 95,000 through December 2026. At this level, the index would trade at a trailing price-to-earnings multiple of 23.5 times, modestly above its 25-year average of 22 times. The premium, the brokerage said, is justified by stronger confidence in India’s medium-term growth cycle, lower market beta, a higher terminal growth rate and a more predictable policy environment.

 

Structurally, the brokerage sees India moving toward a lower-volatility growth regime. Falling oil intensity in gross domestic product (GDP), a rising share of exports -- particularly services -- and fiscal consolidation are expected to reduce savings imbalances and allow structurally lower real interest rates.

 

Lower inflation volatility, aided by supply-side reforms and flexible inflation targeting, could also reduce volatility in growth and interest rates over time. “High growth with low volatility, falling interest rates and low beta support higher P/E multiples,” the note said, adding that these conditions reinforce the ongoing shift of household savings toward equities.

 

Downside risks include a sharper-than-expected global slowdown and worsening geopolitical tensions, which could delay earnings recovery and foreign inflows.