India’s recent market cool-off may be a temporary phase rather than a reset. According to Morgan Stanley, stronger economic growth could help the country regain lost valuation ground and reinforce the investment case for Indian equities. The brokerage added that the relative de-rating has been driven largely by differences in India’s economic growth compared with the rest of the world, but expects the trend to reverse as growth gathers pace. It stated, “India’s relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse”. Morgan Stanley said recent weakness in Indian equities, along with lower foreign investor ownership, could leave the market well placed for a recovery. According to the report, these factors could create a favourable backdrop for Indian stocks in the coming period.The report pushed back against the view that India’s valuation decline is structural. It said concerns around the country’s long-term growth prospects are overstated, including arguments that a falling fertility rate could weigh on economic expansion and that artificial intelligence (AI) could hurt India’s services exports and trade.On demographics, Morgan Stanley said the decline in fertility has not been sudden and is expected to continue supporting economic growth over the next two decades, although it may gradually reduce India’s long-term demographic advantage.It also said AI may slow the momentum of services exports in the near term, but over the medium term the technology offers an opportunity to improve labour productivity from India’s relatively low productivity base.The report added that India’s long-term growth story continues to rest on several structural strengths, including a multi-polar global economy that could help raise the country’s share in global goods trade, an expanding consumer base and a significant increase in investments.While the report said India’s economy appears to have bottomed out and is moving higher, it noted that growth still trails some economies that are benefiting from the global artificial intelligence capital expenditure cycle.According to Morgan Stanley, the next direction for Indian markets will depend on how investors view the growth gap between India and the global economy. It said sentiment could improve if enthusiasm around global AI-related capital expenditure moderates or if India’s economic growth accelerates further.The report also said the upcoming quarterly earnings season will be closely watched by investors and added that companies could deliver positive earnings surprises, supported by strong high-frequency economic indicators.
