Morgan Stanley upgrades India to ‘overweight’ on stable macros

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Mumbai | Updated: May 26, 2016 8:12:05 AM

India currently trades at a 36% premium to the price to earnings (P/E) of the Emerging Markets index due to its macro stability and superior earnings compared to the rest of EMs

Morgan Stanley has upgraded its rating for India to “overweight” from “equal weight” citing the country’s relative valuation to emerging markets (EMs). India, the brokerage points out, is still trading at a 36% premium versus MSCI EM, which it believes is fair given its macroeconomic stability and likely earnings trajectory gap versus the rest of EM.

Other reasons cited for the upgrade are the relative positioning among fund managers, rising dividends per share leading to more attractive dividend yield and a supportive macro economic environment with little deflation threat, expectations of an above average monsoon rainfall and a possibility of productivity-enhancing reforms.

India currently trades at a 36% premium to the price to earnings (P/E) of the Emerging Markets index due to its macro stability and superior earnings compared to the rest of EMs, the  brokerage said in a report on Wednesday.

According to the investment bank’s India strategist, Ridham Desai,  Indian companies’ earnings disappointment so far is mainly due to a combination of sluggish global growth, tight fiscal policy and purchasing price index (PPI) deflation, but India earnings will turn later this year resulting in 3% earnings growth in FY16 before accelerating to 14% y-o-y growth in FY17. In contrast for EM, he estimates a -7% earnings recession in FY16 and 10% y-o-y growth in FY17.

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Morgan Stanley also believes that the goods and services tax (GST) Bill is likely to be approved later this year by the upper house, although the market does not seem the be anticipating this. The clearance of the GST bill could be a major potential catalyst to Indian Equities performance.Global emerging market (GEM) fund managers are turning less overweight in India, with their overweight position coming off to only 5.4% from a record high 7.9% in Q1FY15.

Also the MSCI India 12M forward dividends per share is on a consistent rising path and its dividend yield relative to EM is reaching a historical high level.

Chetan Ayha, India Economist, Morgan Stanley believes there is room for further easing in monetary conditions. Ahya expects RBI to lower rates by another 50bps in FY17. In terms of the pace of rate cuts, he expects RBI to keep rates unchanged in the next policy meeting on June 7, and a higher chance of RBI reducing rates in the October meeting when the full impact of monsoon season will be known.

India’s beta to MSCIEM has significantly reduced since the government change in 2014 to only 0.80x currently. We also see a sign of de-coupling between MSCI India performance versus the rest of EMs.

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