Indian equities hold promise: ‘Rewards will come, require patience’; see what Morgan Stanley has to say

Indian equities are trading at undervalued levels and offer a promising opportunity for patient, long-term investors, Morgan Stanley said in its latest report “India Equity Strategy Playbook.”It highlighted that the stock market has continued to be resilient since September 2024, despite global headwinds. Investors have faced a series of challenges, including overvaluations in small and mid-cap stocks, a broad market correction, volatility from US tariffs, and ongoing geopolitical tensions. Yet, India’s large-cap indices remained within 5% of record highs.“It will require patience, given the potential for bad news from outside India, but we believe rewards will come in time,” the report said, signalling cautious optimism.It attributed this positive outlook to India’s strong macro stability: improving terms of trade, a declining primary deficit, and low inflation volatility.Morgan Stanley also projected a mid-to-high teens earnings growth annually over the next three to five years, driven by three key factors: a budding private capital expenditure cycle, cleaner corporate balance sheets thanks to deleveraging, and a structural increase in discretionary spending.The report, quoted by ANI, referred to the ongoing geopolitical developments and said that they have shaped a new and more assertive stance on national security. This included a tougher doctrine on terror, which could deter future threats and support more decisive action from the government. Notably, the recent boost in India’s military performance was also taken as a sign of improved strategic and combat capabilities.Looking ahead, Morgan Stanley expected India to outperform other emerging markets. “India’s real policy rate relative to the US is turning up in the coming months and could support India’s relative outperformance to EM in the coming months,” it noted.Though the outlook remains largely positive, the report also cited some weak sports and catalysts. Key factors that could boost India’s market included a softer stance from the RBI, possible GST rate cuts, a trade agreement with the US, and stronger-than-expected growth figures.Globally, developments in US monetary policy, the state of the American economy, China’s deflationary pressures, and broader geopolitical risks will remain key external factors. India’s lower sensitivity to global trends means it may outperform in a bear market scenario, but underperform in a bullish global run.In terms of investment strategy, the report recommended a tilt towards domestic cyclicals over defensive and export-oriented sectors, suggesting that investors focus on India’s internal growth drivers rather than relying on global demand.