Global brokerage firm Morgan Stanley has upgraded Indian stocks to an overweight rating and ranked India as the No. 1 market in its basket of Asian emerging markets ex-Japan, surpassing Korea and UAE. The upgrade comes amid a structural uptrend, strong leadership, and relatively less extreme valuations compared to October.

In its report, Morgan Stanley highlighted India as its core overweight market within APxJ/EM, citing a 12-month forward P/E and trailing P/B standing above historical averages, reflecting the premium investors are willing to pay for higher growth opportunities. The valuation premiums to emerging markets (EM) and China have moderated from previous highs, making India an attractive investment destination.

The support of multipolar world trends, robust foreign direct investment (FDI), and portfolio flows are contributing to India’s growth story. The country’s reform and macro-stability agenda are bolstering capex and profit outlooks. Moreover, a secular trend is observed in the sustained superior USD earnings-per-share (EPS) growth compared to EM, supported by a young demographic profile attracting equity inflows.

Morgan Stanley’s India economics team remains positive on the country’s macro indicators, projecting a 6.2% GDP growth. They see a structural increase in 12-month forward EPS, driven by favorable demographics, improved labor productivity, and rising service exports and foreign direct investment.

Consequently, the brokerage downgraded China to equal weight, citing a lack of convincing recovery in domestic demand post-Covid. They believe that Indian equities are poised to outperform Chinese equities in USD terms, signaling the beginning of a new era of Indian outperformance.

In the Indian market, Morgan Stanley is overweight on financials, consumer discretionary, and industrials sectors. Maruti Suzuki and L&T have been added to its focus list, with target prices of Rs 9,716.8 and Rs 2,666.7, respectively. Maruti is expected to benefit from higher per-capita income, market share expansion, and improved product mix. L&T, a capex play, enjoys economies of scale and favorable comparisons with peers in terms of order inflow growth, diversified order book, execution, revenue growth, and lower margin volatility.

The Asia Pacific ex-Japan Focus List includes two other Indian stocks, Hindustan Aeronautics and ICICI Bank.

Indian stocks have reached record high levels, driven by a record inflow of approximately Rs 1.5 lakh crore in FY24 and encouraging June quarter earnings. Morgan Stanley’s positive outlook for India reaffirms the country’s potential as a top investment destination.

By Impact Lab