Morgan Stanley raises India’s ‘overweight’ position, and makes China pay for it

While many suggest that India’s share markets have priced in a swift earnings recovery, global brokerage and research firm Morgan Stanley believes there is further scope for positive surprises. Aided by this view Morgan Stanley has increased its ‘overweight’ position on India, along with Korea and Brazil. The adjustment is made by reducing its rating on MSCI China to ‘equal-weight’. In a recent note, co-authored by Ridham Desai and Sheela Rathi, Morgan Stanley said that India could outperform emerging markets in 2021.

“While global equity markets continue to be the basis for market moves, India could become idiosyncratic with its own dynamics on policy, earnings, COVID-19, vaccine and real rates, and likely outperform EM in 2021,” the note said. Indian stock markets have underperformed emerging markets over the past five years as growth turned out to be less than expected.

Strong growth momentum

In 2021, Indian equities are expected to be supported by multiple factors, including government policy decisions. “With COVID-19 infections appearing to have peaked, government policy action beating expectations, and Indian companies picking up activity through the pandemic, we expect growth to surprise on the upside,” Morgan Stanley said. Additionally, strong agricultural output, recovery in global exports, and monetary stimulus could help.

Desai and Rathi expect a series of upgrades for domestic stocks after a hiatus of several quarters, adding that the upcoming growth cycle might not be fully priced in. “The earnings yield gap model indicates that earnings will rise 20% in the coming 12-months in line with our top-down forecast but we may be entering a multi-year cycle which is likely not yet priced in,” they said.

Key catalysts

Global equities are among the key catalysts that could move domestic markets ahead. Any depreciation in the Dollar index is expected to bode well for Indian stocks. Along with that, the momentum of policy action such as the recent laws on agriculture, labour, and manufacturing is being keenly watched. On the monetary policy front, the downward rate cycle is expected to be over. “With inflation likely to remain sticky due to supply-side issues and interest rates likely to be at current low levels to address growth concerns, real rates may remain in negative territory for most of 2021,” the note said.

India has also managed to tame the coronavirus pandemic with cases continuing to slip and case-fatality rate now well below peak levels. To add to that vaccine roll-out with a home-grown vaccine and strong production infrastructure. Morgan Stanley said that local short period shutdowns could be the way forward if at all, implying that the economic recovery is likely to gain momentum.