Stock market: Three sectors Morgan Stanley's Ridham Desai is bullish on

The domestic investors have outrun foreign portfolio investors (FPIs) in the Indian market for the first time in over a decade. The latest macroeconomic risks led to a steep selloff from overseas investors in the market, while domestic investors combined holding in mutual funds and stocks have made strong growth. Morgan Stanley said, in the Indian market, the last quarter alone saw a 90 basis points rise in domestic ownership while FPI ownership declined 84 basis points sequentially in the top 75 companies. The American financial services firm is upbeat about the financials, consumer discretionary, and industrials sector in India.

In its latest report, equity strategists Ridham Desai and Nayant Parekh along with equity analyst Sheela Rathi at Morgan Stanley, said, "domestic share owners are price setters in India and bought Financials, Consumer Discretionary and Industrials in the trailing quarter - our top three sector recommendations albeit the position sizes are narrower than what we think iswarranted in a macro-driven market."

Data from Stanley revealed that since 2015, the combined holdings of domestic mutual funds and direct households in stocks have climbed more than 720 basis points, whereas FPIs holding has contracted by 230 basis points. In the last quarter, domestic ownership in their sample of 75 companies has surged by 90 basis points while FPIs have declined by 84 basis points on a quarter-on-quarter basis.

"At 25.6% ownership of India's largest 75 companies, domestic investors are now larger holders than FPIs for the first time since 2010," Stanley's report said.

Further, average sector positions rose in the latest quarter led by domestic institutions albeit FPIs continue to run more active portfolios.

The report said, "We opine that we are in a macro-driven market, implying that sector positions should be wider than normal as we have been doing since 1Q2022."

Giving contrarian sector calls, the Stanley experts said, "We are overweight on Financials, on domestic cyclical (Consumer and Industrials) and Technology and underweight all other sectors. FPIs are overweight on Financials and lifted the relative position by 40 bps during the quarter after taking it down for five consecutive quarters. The position is still 540 bps below the peak of Sep-19. The biggest FPI selling happened in Technology where they have gone underweight during the quarter."

Also, Stanley's report added, "FPIs are also underweight on Consumer Discretionary and Industrials – distinct from our recommendations. While domestic institutions added to Technology during the quarter, they remain underweight."

"They also added Financials and Consumer Discretionary but are overweight on neither. They are overweight on Communication Services, Consumer Staples, and Utilities in divergence from our view," the report said.

The only sector where Stanley experts are in sync is Industrials where they recently raised their weight.

Lastly, the report said, "From among the top 20 aggregate institutional holdings, active positions (relative to the MSCI Index) rose the most for ITC and declined the most for Reliance during the QE June 2022."