India's market valuation decline is temporary, growth recovery could boost equities: Morgan Stanley
New Delhi, July 6
India's recent decline in market valuations is temporary rather than structural, and a recovery in economic growth could help reverse the trend and provide a boost to equities, according to a report by Morgan Stanley.
The report said that the combination of subdued recent market performance and lower foreign investor ownership could create a favourable environment for Indian equities going forward.
It stated, "India's relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse"
Morgan Stanley argued that concerns suggesting India's valuation decline is structural are overstated.
According to the report, one argument for a structural de-rating is that India's long-term growth could slow because of a declining fertility rate. Another concern is that artificial intelligence (AI) could hurt India's services exports and trade.
However, the report said both concerns are exaggerated.
It noted that while fertility rates are slowing, the change has not been abrupt and is likely to support economic growth over the next two decades, even though it may gradually reduce India's long-term demographic advantage.
On artificial intelligence, the report said AI could pose a near-term challenge to the country's services export momentum. However, over the medium term, it also presents a significant opportunity to improve labour productivity from India's relatively low productivity base.
Morgan Stanley further said India's long-term growth outlook remains supported by several structural factors, including a multi-polar global economy that could increase India's share in global goods trade, a growing consumer base and a significant pickup in investments.
The report therefore concluded that the decline in India's market valuation is mainly cyclical and reflects the gap in relative economic growth compared with the rest of the world.
However, the report also shared that although India's economic growth appears to have bottomed out and is now moving higher, it still trails growth in some other economies, particularly those benefiting from the global artificial intelligence capital expenditure cycle.
Looking ahead, Morgan Stanley said the key trigger for Indian markets will be how investors assess the growth gap between India and the global economy.
The report said market sentiment could improve if optimism around global AI-related capital expenditure moderates or if India's economic growth accelerates further.
Morgan Stanley also expects the upcoming quarterly earnings season to provide important signals for investors and believes companies could deliver positive earnings surprises, supported by strong high-frequency economic indicators.
— ANI
Reader Comments
Honestly, I'm not fully convinced. AI threat to our IT services is real - look at how global companies are cutting outsourcing budgets. The fertility rate decline also means we can't just rely on demographic dividend forever. Need actual policy changes in manufacturing and education.
Typical FII narrative - they pull money out for months, then say 'cyclical decline' when they start buying back. Meanwhile, retail investors like us are left holding the bag. Let's see what the earnings season actually shows. Actions speak louder than reports.
I trust the long-term India story. We're the fastest-growing major economy, infrastructure is improving, and domestic consumption is strong. The AI concern is overblown - we have a huge English-speaking talent pool that can adapt. Just need patience. ✨
Good analysis but missing the big picture - political stability matters! With elections coming in some states, investors will wait and watch. Also, why no mention of valuation gap with China? That's what FIIs actually compare before deciding.
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