Morgan Stanley

Relative economic/earnings growth is improving and the macro-stability setup looks sufficient to withstand the higher real rate environment. The "DREAM" run of domestic flows continues and multipolar world dynamics are driving both FDI and portfolio flows toward India, Morgan Stanely said.

"We see India, Mexico and Southeast Asia as best positioned for this transition. India and Mexico are two economies that stand to benefit from increasingly local supply chains," Morgan Stanley said in a report. Morgan Stanley economists have written extensively on the economic and industrial benefits that are beginning to accrue in economies where supply chains are migrating.

According to Morgan Stanley, India is benefitting from a combination of cyclical and structural tailwinds and is expected to contribute 16 per cent of the global gross domestic product (GDP) over 2023-24. "In recent months, a wide variety of indicators suggest that India's recovery is strong and broad-based, and is well-placed to sustain growth rates of above 6 per cent," the report said.

The report also said the inflation in India is likely to be below 5 per cent in the second quarter of calendar year 2024. According to Morgan Stanley, the key for sustained domestic demand is a pickup in capex, which will help create more jobs, thus leading to a virtuous cycle of more jobs-to-higher income-higher savings-higher investment. The headline consumer price index (CPI) print for March was in line with expectations.

"This Budget probably means the consensus may need to raise earnings estimates - we remain 10 per cent ahead of the consensus EPS on the BSE Sensex. Our overweight sectors are: Financials, Discretionary Consumption and Industrials. We remain underweight on global sectors and defensives, except technology," the report said.

Expressing confidence in emerging markets bull cycle, it said that "a new bull cycle is beginning". "We now feel even more confident in a new bull cycle for Asia/EM equities. We raise our base case MSCI EM target a further 10 per cent to 1,100 (12 per upside)... We also upgrade China to overweight, joining our broader North Asia preference," it noted in the report.

"We expect 2023 to be a year of disinflation. Asia's inflation, which had more of a cost push element, has already peaked in 3Q22. For 90 per cent of the central banks in Asia, inflation will return to target/comfort zone by 3Q23. In contrast, inflation will remain somewhat above target in the US and Euro Area," Morgan Stanley said.