Sticky inflation, resilient growth to favour equities globally; investors may require diversified approach for fixed income: Report
New Delhi, August 4
Sticky inflation and resilient growth would likely favour equities; meanwhile, fixed income may require a more selective and diversified approach, according to a report by Morgan Stanley.
The report noted that equities could benefit from stronger nominal growth, with fiscal policy, tax incentives and deregulation providing additional support.
Morgan Stanley expects inflation to remain above target as resilient labour markets, productivity gains and capital investment will likely support real growth. "In this backdrop, equities are likely to benefit from stronger nominal activity, while fixed income may require a more selective and diversified approach to deliver attractive returns," it noted.
Corporate earnings expectations have also continued to rise, supported by robust demand, improving productivity and expanding investment cycles. "We expect this trajectory to persist as long as the CapEx cycle continues to expand," it said.
While the inflation outlook has turned higher, there are chances that key pressures may ease as tariff, energy and AI effects fade, Morgan Stanley notes. "Inflation may continue to skew high relative to target, while real growth appears poised to remain firm, supported by resilient labor markets, productivity gains and capital investment," the report noted.
The report noted that while headline valuations appear elevated, they remain reasonable relative to earnings growth prospects and a structurally stronger nominal economy. It also expects market breadth to widen as geopolitical tensions ease, with several sectors still trading at lower valuations and offering room for a rebound.
For emerging markets, the report highlighted "divergence" as a key theme. It noted that while equity valuations appear attractive, earnings revisions remain strong, led mainly by AI beneficiaries such as Taiwan and Korea. However, the report flagged that weak domestic momentum and limited policy support in China pose downside risks, while India faces a cyclical slowdown amid AI- and energy-related headwinds.
Overall, it recommended investors seek income through a blend of investment-grade credit, high yield and emerging market debt rather than entirely relying on duration. "We believe fixed income's alpha contribution remains dependent on actively managing duration and credit risk," it said.
— ANI
Reader Comments
Finally a report that acknowledges the complexity! Here in India, we're seeing FIIs coming back, but retail investors need to be careful. The suggestion about diversified fixed income approach makes sense - you can't just put everything in FD or bonds these days. Good wake-up call for conservative Indian investors.
Morgan Stanley always has a global perspective, but their view on India needs context. Our market is driven by domestic consumption, not just AI or energy. The "cyclical slowdown" they mention - have they seen our Q1 results? Many Indian companies are beating estimates. Let's not get spooked by foreign reports. 💪
That's interesting to hear from an Indian perspective. The report seems balanced but I'd like to know more about how retail investors in India should adjust their portfolios. The fixed income recommendation is particularly relevant given our inflation and RBI's stance.
As someone who's been investing in Indian markets for 15 years, I've learned to take these global reports with a pinch of salt. Yes, inflation matters, but our economy has its own dynamics. The earnings growth story is real - just look at our banking and infrastructure sectors. Having said that, diversification across asset classes is always wise. 👍
The report's emphasis on emerging market divergence is spot on. India needs to watch out - while we're doing well on many fronts, we can't ignore that AI and energy transitions will impact us. Maybe it's time for Indian policymakers to think about more targeted policies to support these sectors. Otherwise, we might lose our competitive edge.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.