Morgan Stanley has upgraded its stance on India to ‘overweight’ on the back of multipolar world trends that support FDI and portfolio flows, boosted by India’s reform and macro-stability agenda that underpins a strong capex and profit outlook.
The report by the foreign bank said India is now the most-favoured equity market, with relative valuations less extreme than in October last year. It sees a secular trend with respect to sustained superior dollar EPS growth than other, with equity inflows being given a fillip by the young demographic profile.
China, on the other hand, has slipped to the 13th rank, owing to negative earnings revisions and weak return on equity and profit margins. The report points out that issues such as LGFV (local government financing vehicle) debt, property and labour markets and the geopolitical situation need to improve for a re-rating.
In addition, China is faced with the new challenge of coping with multipolar world pressures (from the US in particular), leading to new restrictions on inward technology transfers and a more generalised slowdown in inward FDIs and FPIs. Passing of the US executive order on outbound investment screening in August would only add to the woes.
Aggressive policy implementation and solutions to such structural problems could lead to a more positive stance on the country.
According to Morgan Stanley, India is “arguably at the start of a long wave boom at the same time as China may be ending one” — with GDP per capita of only $2,500 per capita (compared to $12,700 for China) and positive demographic trends. Household debt/GDP in India is 19%, vis-à-vis 48% in China.
Among key factors, manufacturing and services PMIs have rallied since the end of Covid restrictions, in contrast to a rapid fall seen in China. In addition, real estate transaction volumes and construction have broken out to the upside. India’s ability to leverage multipolar world dynamics is also a significant advantage, says the report.
Strong FDI flows thanks to American, Taiwanese and Japanese firms exploring the large domestic market here, and a much-improved export infrastructure situation have boosted India’s appeal. Private equity firms are expanding in India (and ASEAN) while they are struggling with exits in China.
