Indian Stocks: A Rare Combination that Supports Re-Rating — Insights from Morgan Stanley’s Ridham Desai
Indian equities are currently experiencing what Morgan Stanley’s Ridham Desai describes as a “rare combination” phase. This unique situation bolsters the argument for a significant re-rating of domestic stock valuations.
Key Factors Supporting the Re-Rating of Indian Stocks
Desai outlines several compelling factors that contribute to the potential re-rating of Indian stocks:
– Inexpensive Relative Valuations: Current relative valuations are approaching historical lows, indicating an attractive entry point for investors.
– Weak Trailing Performance: Despite being historically poor, this metric opens the door for future recovery.
– Strong Policy Stimulus: Government interventions combined with the Reserve Bank of India’s support could amplify growth.
– Undervalued Currency: The Indian rupee’s current status suggests favorable conditions for international investments.
– Weak Foreign Positioning: Reduced foreign portfolio investor (FPI) engagement allows for more room to grow.
– Possible Buyback Cycle: Expectations of new corporate buybacks may further enhance stock attractiveness.
Desai notes that India’s 12-month trailing performance is at a historical low, intensifying the case for future rebounds as FPI positioning has declined steadily over the last four years.
“India could be a pain trade, which may just accelerate returns on stocks,” the report suggests. Ongoing favorable conditions like an undervalued rupee and a more welcoming tax regime are likely to stimulate further buybacks and keep net equity supply modest.
Macroeconomic Landscape Favoring Indian Stocks
Morgan Stanley anticipates a noticeable turnaround in earnings growth as India’s economic growth cycle accelerates, driven by collaborative efforts from the Reserve Bank and the government. The report emphasizes the following macro updates:
– Policy Coordination: A combination of rate cuts, bank deregulation, aggressive liquidity infusion, continued capital expenditures, and a stimulating budget signals an end to India’s tightly controlled macro environment post-Covid.
– Enhancements to Trade Relations: Improved relationships with trading partners, particularly China, stand to serve as additional catalysts.
Desai emphasizes that the shifts in the economic framework will likely lead to lower real rates and reduced volatility in both inflation and interest rates in the coming years.
Projected Growth and Targets for Sensex
Morgan Stanley sets an ambitious yet achievable target for the Sensex, outlined as follows:
– Base Case: A December 2026 target of 95,000, indicating a 13% upside with a trailing P/E of 23.5 times, aiming to reflect growing confidence in medium-term growth.
– Bull Case: At a 30% probability, the Sensex is projected to rise to 107,000, contingent on oil prices staying below $60 per barrel and successful reflation efforts boosting growth estimates.
– Bear Case: A more pessimistic scenario, allocated a 20% probability, would see the Sensex dip to 76,000 due to rising oil prices necessitating RBI tightening and broader global growth challenges.
Key Drivers of Future Stock Growth
The overarching optimism is underpinned by signs indicating a turnaround in the earnings cycle. Significant insights include:
– Leading Earnings Indicators: Morgan Stanley’s proprietary metrics are signaling improving earnings trends.
– Valuation Metrics: Their composite valuation framework suggests equity returns of approximately 16% over the next year.
The anticipated earnings growth for Sensex shows promising compounding rates, projected at 17% annually through FY28.
Investment Positioning and Market Sentiment
Positioning and market sentiment play critical roles in the re-rating narrative:
– India’s Emerging Market Weight: The relative weight of Indian stocks in global funds suggests potential for a ‘pain trade’ if foreign investors rectify underweight positions.
– Positive Sentiment Indicators: Morgan Stanley’s sentiment indicators signal a strong buying opportunity, providing a contrarian insight into market dynamics.
Within sector analysis, the firm favors domestic cyclicals over defensive stocks, expressing confidence in financials, consumer discretionary sectors, and industrials while advising caution toward energy, materials, and healthcare.
Desai concludes that Indian equities are supported by favorable macroeconomic policies, improving earnings, and positive positioning, yet are not fully reflecting the potential for re-rating. With conditions conducive to “high growth with low volatility,” the outlook remains bright for Indian stocks over the next couple of years.
(Disclaimer: The recommendations, suggestions, views, and opinions expressed by the experts are their own and do not represent the views of The Economic Times.)