Media365
India’s recent underperformance in stock market valuations is temporary rather than structural, and an improvement in economic growth could pave the way for a fresh rally in domestic equities, according to a report by Morgan Stanley.
The global brokerage believes India’s relative market de-rating is largely cyclical and reflects a temporary slowdown in economic growth compared with some global peers, rather than a deterioration in the country’s long-term fundamentals.
“India’s relative de-rating is cyclical and, with growth acceleration in the pipeline, has the potential to reverse,” the report said.
Morgan Stanley argued that fears of a structural decline in India’s valuation are exaggerated. It dismissed concerns that slowing fertility rates or the rapid adoption of artificial intelligence (AI) would significantly weaken the country’s long-term growth prospects.
While acknowledging that India’s fertility rate is gradually declining, the report said the demographic shift is unfolding slowly and is unlikely to derail economic growth over the next two decades. Although the country’s demographic advantage may moderate over time, it is expected to remain a key driver of growth in the medium term.
On artificial intelligence, the brokerage noted that AI could create near-term headwinds for India’s services exports. However, it also sees the technology as a significant opportunity to enhance labour productivity, particularly given India’s relatively low productivity base.
The report highlighted several structural factors that continue to support India’s long-term economic outlook, including a multipolar global economy, increasing participation in global goods trade, a rapidly expanding consumer market and a sustained investment cycle.
Morgan Stanley also pointed out that subdued market performance and lower foreign institutional investor (FII) ownership have created conditions that could become favourable for Indian equities if growth accelerates.
The brokerage noted that India’s economic growth appears to have bottomed out and is gradually improving, although it still lags economies benefiting from the ongoing global AI-led capital expenditure cycle.
According to the report, investor sentiment will largely depend on how markets assess the growth differential between India and the global economy in the coming months.
It added that Indian equities could witness renewed optimism if global enthusiasm around AI-driven capital expenditure moderates or if domestic economic growth gathers further momentum.
Morgan Stanley also expects the upcoming corporate earnings season to provide important direction to markets, saying strong high-frequency economic indicators raise the possibility of positive earnings surprises from Indian companies.
