India has experienced many changes in less than a decade, Morgan Stanley said in a research report.
These include supply-side policy reforms such as a build up in infrastructure, formalisation of the economy via GST and IndiaStack, massive change in real estate regulations, digitalisation of social transfers making them leak proof, a new bankruptcy law coupled with a sharp decline in corporate balance sheet leverage, flexible inflation targeting that has improved India's macro stability, focus on FDI which is reducing India's correlation with global markets, India's 401(k) moment which has created a reliable domestic source of risk capital, and government support for corporate profits and multi-year highs on MNC sentiment.
Bottom line, India is rising in the world order with significant positive macro and market implications, the report said.
Manufacturing and capex are resurgent, exports are rising, the current account is becoming more benign, consumption is undergoing radical shifts and interest rate cycles are likely to become shallower.
The concomitant profit book, lower return correlation of equities with oil and US growth/Fed cycles and a lower beta to EM set India up for strong equity markets, albeit relative valuations remain rich, and India's low beta status implies it underperforms an EM bull market even as India offers much stronger relative earnings growth and is also likely to benefit from the troughing of the real rate gap with the US, the report said.
Citing key risks, the report said they are slower global growth, tight global liquidity, weather vagaries and their impact on farm output, potential worsening of state fiscal position and a resurgence in commodity prices. The most important catalyst in 2H2023 is the market's view on the 2024 general election outcome.
The equity market continues to be attractive despite rich relative valuations largely due to strong earnings growth prospects and a swelling bid from both domestic and foreign investors.
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