Morgan Stanley Bullish on India: Strong Growth and Reforms Ahead

The report said steps such as RBI rate cuts, liquidity support, strong government spending and rising investments in sectors like defence, semiconductors, energy and data centres are expected to boost the economy and support stock markets in the coming months.

"With growth acceleration likely in the pipeline and valuations and sentiment at near extremes, Indian equities are poised for a strong year ahead," the report stated.

According to Morgan Stanley, India's earnings cycle is turning after witnessing a six-quarter mid-cycle slowdown.

The report noted that earnings growth is likely to accelerate further due to several supportive factors, including reflationary policies by the Reserve Bank of India (RBI) and the government.

The report highlighted that policy measures such as interest rate cuts, bank deregulation and liquidity infusion are expected to support growth.

Morgan Stanley also pointed to strong capital expenditure trends across sectors. It added that large tax cuts and a relatively supportive fiscal environment are also helping improve the outlook for the Indian economy.

The report observed that India's macroeconomic environment, which had turned relatively hawkish after the COVID period and had led to weak investor sentiment towards Indian markets, has now started to ease.

The report further stated that progress in trade agreements with the United States and the European Union, along with improving relations with China, are also adding support to India's growth outlook.

Morgan Stanley said the Indian currency currently remains undervalued on a real effective basis, while domestic equity inflows remain strong.

The report highlighted that the trailing 12-month relative performance of Indian equities has been the weakest in history, while relative valuations are near previous low levels and foreign investor positioning is at multi-year lows.

It also noted that India's share of global corporate profits currently exceeds its global index weight by the highest margin seen since 2009.

On investment positioning, Morgan Stanley said it prefers domestic cyclical sectors over defensive and external-facing sectors.

The report stated that it remains overweight on financials, consumer discretionary and industrial sectors.

Morgan Stanley also said that information technology services companies could emerge as a "dark horse" as global demand for AI applications and solutions increases.

"IT services could be the dark horse as the world pivots to these companies to build AI applications and solutions," the report said.

However, the report cautioned that the key risks to India remain largely external in nature. These risks include geopolitical tensions and slowing global economic growth.

- ANI