Has the India-US trade deal turned the momentum for Indian equities? A report by Morgan Stanley indicates that India does make a case of re-rating. They see “India’s hawkish macro set-up post-Covid unwinding. The trade deals and thawing of relations with China add to the mix.” As a result, Morgan Stanley is Overweight financials, consumer discretionary and industrials. Apart from RIL and Maruti, key Tata Group stocks are also part of their India focus list.
Why Morgan Stanley sees ‘case for re-rating’
However, first let’s understand why Morgan Stanley sees a “case for re-rating” for India. According to the international brokerage house, “the falling intensity of oil in GDP and rising share of exports in GDP, especially services, and fiscal consolidation imply a lower saving imbalance.”
They believe that this will allow structurally lower real rates. At the same time, Morgan Stanley pointed out that “lower inflation volatility as a result of both supply-side and policy changes means that volatility in interest rates and growth rates is likely falling in coming years.” According to them, “high growth with low volatility and falling interest rates and low beta = higher P/E.”
They see a sharp turn in earnings growth in India over the coming months. “India’s growth cycle is set to accelerate, backed by the reflation efforts of the RBI and the government via rate cuts, bank deregulation and liquidity infusion, continuing capex, tax cuts and a relatively stimulating budget,” Morgan Stanley added.
Some of the key growth signals, as per Morgan Stanley, include
-Expect positive earnings revisions
-RBI policy, “which we think will support liquidity and loan growth”
-Policy reforms – “several measures including privatisation are likely underway”
–FPI positioning remains near lows but “net FPI buying will need growth to recover and/or bull markets elsewhere to fade plus a rise in corporate issuances.”
The downside risks, Morgan Stanley pointed out, “arise from slowing global growth and worsening geopolitics.”
Morgan Stanley’s big sector bets
The key question then is, what’s the right portfolio strategy now?
Outlining their portfolio strategy, Morgan Stanley maintained that “we are capitalisation-agnostic and think a macro trade is unfolding (in contrast the stock pickers’ environment in 2025).”
Morgan Stanley is betting on domestic cyclicals over defensives and external-facing sectors. A quick look at their sector-wise preferences –
–Consumer Discretionary: They expect a recovery in urban demand to aid overall consumption demand
–Industrials: Morgan Stanley outlined that robust government capex and a pickup in private capex are the key drivers of the Overweight stance.
–Financials: They are prioritising this sector on the back of rising credit growth, and “low credit costs are only partly offset by likely NIM compression. Deregulation appears positive for the banks,” Morgan Stanley added.
On sectors like communication services and consumer staples, Morgan Stanley has an ‘Equal Weight’ recommendation. They believe that fundamentals could improve as growth recovers. Additionally, Morgan Stanley is ‘Underweight’ utilities, healthcare and energy, though they prefer domestic cyclicals over global cyclicals.
Morgan Stanley on Indian IT sector
Specifically on the information and technology sector, Morgan Stanley has an ‘Equal Weight’ stance. According to them, this, as a sector, is “least exposed to domestic growth, although weakening of US growth is a risk.”
Moreover, the “AI debate is hurting the sector’s multiples but may not hurt earnings in the foreseeable future,” they added.
Morgan Stanley’s Focus List
The 10 Indian stocks that comprise the Morgan Stanley focus list include-
-Maruti Suzuki in auto
–Trent and Titan from the Tata Group
–Varun Beverages in consumer staples
-Reliance Industries in the energy sector
–Bajaj Finance, ICICI Bank in financials
–L&T, InterGlobe Aviation in industrials
–UltraTech Cement in the materials space
Conclusion
Overall, Morgan Stanley’s base case prediction for India is Sensex at 95,000 by December. They see a 50% probability of this scenario. They also predict a 30% probability of Sensex scaling past the 1 lakh mark to 107,000 if oil remains consistently below $60/bbl in sync with other growth catalysts like “robust domestic growth and steady global growth.”
However, Morgan Stanley does not rule out the risk of a downside either, given the continuing headwinds. They do see 20% probability of Sensex slipping to 76,000 if oil prices surge past $90/barrel and the RBI ends up tightening to protect macro stability.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.