Six reasons why investing in India is a compelling case - Ridham Desai of Morgan Stanley explains

Ridham Desai of Morgan Stanley believes that the Indian stock market could be in the midst of a multi-quarter growth upcycle, and given that valuations are supportive, he expects the market performance to improve considerably in the months ahead.

In his note on Monday, September 7, Desai said that high frequency indicators, including corporate earnings, look solid, underscoring an upcycle in progress due to improving investments, monetary policy support, an undervalued currency, lack of fiscal headwinds, and a recovery in the consumer sentiment.

India is in the midst of far reaching reforms that could lift the country's growth rates in the coming future, Desai's note said. While IPOs are also on the rise, Desai said that they are not "excessive" yet and that point is still "several months off."

Desai's note highlights six points why equity investors have a compelling case to invest at current levels. They include:

• Broad-based growth acceleration


• Robust domestic flows


• A nascent IPO pipeline


• Weak trailing 12-month performance


• Relative valuations just off all-time lows


• and foreign positioning that remains very weak

India's share of global profits now exceeds its global index weight by the widest margin on record outside 2009, the note further said.

Is India's Valuation De-rating Secular or Cyclical?

Two arguments that are behind India's de-rating, including a projected lower terminal growth rate, driven by falling fertility rate or by the impact of Artificial Intelligence on India's services economy and trade.

Both the arguments, according to Desai, are exaggerated. According to the note, the slowing fertility aids growth over the next two decades, even as it narrows India's very long-term demographic edge and while AI does pose a near-term risk to India's services export momentum, it offers a change to lift labour productivity in the medium-term due to a low base.

"We therefore read the de-rating as cyclical, the outcome of a sharp negative gap in relative growth. India's growth looks to have bottomed and is now trending higher, yet still trails that seen elsewhere, particularly in economies tied to the AI capex cycle," Desai wrote in his note.

How Is Morgan Stanley's India Portfolio Positioned?

Morgan Stanley prefers domestic cyclicals over defensives and externally facing sectors.

The brokerage is overweight on financials, consumer discretionary, and industrials, while it is underweight on energy, materials, utilities and healthcare.

Desai also believes that the IT sector could turn out to be a dark horse as the world turns to these firms to build AI applications and solutions.

Domestically, concerns include weak farm productivity, capacity bottlenecks in the judiciary and embodied AI weighing on labour markets, the note added.