Why did Morgan Stanley upgrade India? Will it mean more foreign inflows for the Indian stock market?

Morgan Stanley upgrades India to 'overweight', downgrades China; cites favorable valuations and strong growth outlook.

Nishant Kumar
Updated3 Aug 2023, 08:15 PM IST
Despite the 8.2% India GDP growth rate in April-June 2019, other macroeconomic indicators suggest problems in the Indian economy. Photo: AFP
Despite the 8.2% India GDP growth rate in April-June 2019, other macroeconomic indicators suggest problems in the Indian economy. Photo: AFP(Agencies)

After rating agency Fitch Ratings downgraded the US credit rating on Tuesday, global financial major Morgan Stanley upgraded India to 'overweight' while downgrading Australia to 'underweight' and Taiwan and China to 'equal-weight'.

"India rises from number 6 to number 1 in our process, with relative valuations less extreme than in October," Morgan Stanley said, adding that "multipolar world trends are supporting FDI and portfolio flows, with India adding a reform and macro-stability agenda that underpins a strong capex and profit outlook."

"We see a secular trend toward sustained superior USD EPS (earnings per share) growth versus EM (emerging market) over the cycle, with a young demographic profile supporting equity inflows," Morgan Stanley said.

Read more: Morgan Stanley upgrades India to Overweight citing ‘less extreme’ valuations; downgrades China to Equal-weight

Why did Morgan Stanley upgrade India?

Morgan Stanley believes a new bull market started in emerging markets last October. From the trough in late October, MSCI EM is up around 25 per cent, Morgan Stanley pointed out.

While the global financial firm downgraded China, it underscored situation in India is in "stark contrast to that in China."

"With GDP per capita only $2.5k per capita (versus $12.7k for China) and positive demographic trends, India is arguably at the start of a long wave boom at the same time as China may be ending one. Consider that household debt/GDP in India is just 19 per cent versus 48 per cent for China and only 2 per cent of Indian households have life insurance," Morgan Stanley observed.

Besides, Morgan Stanley observed that "manufacturing and services PMIs have rallied consistently since the end of Covid restrictions in contrast to the rapid fade seen in China. As well, real estate transaction volumes and construction have broken out to the upside."

Morgan Stanley highlighted India's ability to leverage multipolar world dynamics as a significant advantage.

"It is a member of the Quad political framework with the US, Australia and Japan. It is benefitting from a surge in inward FDI, including from US, Taiwan and Japanese firms looking to its own large domestic market as well as a much-improved export infrastructure situation vis-à-vis more-efficient ports, road and electricity supply. Private equity firms are expanding in India (and ASEAN) simultaneously as they are struggling with exits in China," said Morgan Stanley.

The global financial firm believes India's future looks to a significant extent like China's past, expecting GDP growth in China to be around 3.9 per cent by the end of the decade versus 6.5 per cent for India.

Read more: 'India is arguably at start of a long wave boom': 10 things Morgan Stanley said about India

Will Morgan Stanley upgrade mean more foreign inflows for the Indian market?

Morgan Stanley upgrade is justified and positive for India, say experts. They believe India is in a sweet spot and will continue witnessing a healthy inflow of foreign funds because of its robust economic outlook.

G. Chokkalingam, Founder & Head of Research at Equinomics Research pointed out that recently IMF raised India’s GDP growth to 6.1 per cent for FY24 from a previous estimate of 4.9 per cent and also expects India’s inflation to decline to 4.9 per cent in FY2024. The government debt to GDP ratio moderated further and capex is rising significantly. All this will augur well for the country and will boost foreign capital inflow, Chokkalingam said.

Shrey Jain, Founder and CEO of SAS Online said Morgan Stanley's bullish stance on India serves as an invitation not only to Indian investors but also to investors worldwide, including FIIs and rating agencies.

"We can expect a continued inflow of foreign capital into the Indian market," said Jain.

Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services at Waterfield Advisors pointed out that India has long-term structural interest among most investors.

"The prevailing narrative among global FPIs is India's growing business and political stability, superior demographics, regulatory strength, manufacturing potential, and sovereign investor friendliness. Over the next few years, FPIs will allocate more to India if this structural narrative remains intact, macroeconomic stability is maintained, and relative values don't become completely irrational," said Bhargava.

Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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First Published:3 Aug 2023, 08:15 PM IST
HomeEconomyWhy did Morgan Stanley upgrade India? Will it mean more foreign inflows for the Indian stock market?

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