Morgan Stanley India Equity Strategy Handbook: Do Not Venture Against Policymakers

Morgan Stanley observes that Indian equities currently present a rare combination of cheap relative valuations and historically poor recent performance, juxtaposed against strong policy stimulus, an upswing in the growth cycle, an undervalued currency, and low foreign ownership. The past twelve months marked the worst relative performance on record, bringing valuations near previous troughs. The Reserve Bank of India and the government are actively driving reflation efforts through rate cuts, regulatory relief, liquidity injections, sustained capital expenditure, tax reductions, and a stimulative budget. This is causing the post-pandemic hawkish macro environment to fade. Additional tailwinds include potential trade agreements and thawing relations with China. Morgan Stanley argues that India could become a "pain trade" that accelerates equity returns as foreign positioning remains low. Furthermore, improved tax conditions and moderate net equity issuance may trigger a new cycle of share buybacks. Structural revaluation drivers include declining oil intensity, rising service exports as a percentage of GDP, and fiscal consolidation, which collectively lower savings imbalances and allow for structurally lower real interest rates. Coupled with decreasing inflation volatility, this high-growth, low-volatility environment supports higher P/E multiples. The firm favors domestic cyclicals over defensive and externally oriented sectors, specifically overweighting financials, consumer discretionary, and industrials.