Morgan Stanley upgrades India to Overweight, says valuations less extreme now than in October

Morgan Stanley upgrades Indian equities: Morgan Stanley has raised India’s rating to overweight, saying relative valuations are 'less extreme' than in October, and the nation’s reform and macro-stability agenda supports a strong capex and profit outlook.

"India is arguably at the start of a long-wave boom at the same time as China may be ending one," strategists at Morgan Stanley wrote in their latest research note.

Meanwhile, the global brokerage has downgraded China and Taiwan to equal weight. It has also cut Australian equities' rating to underweight, citing earnings and valuation risks. In Australia, "earnings remain in a downgrade cycle and valuations look expensive as the delayed impact of RBA tightening continues to affect households and interest-sensitive sectors," equity strategists including Jonathan Garner and Laura Wang wrote in an August 2 note.

Risks to bulk commodity prices are skewed lower, given emerging oversupply in the second half of 2023, the report added. Further, MS maintained its overweight rating on Korea, citing more valuation support and "non-tech drivers" relative to Taiwan.

Domestic equities have been on a solid footing this year; however, there have been intermittent declines too. The benchmark indices, BSE Sensex and NSE Nifty have hit a series of record peaks in the recent past. The record rally took a halt after some big marquee names disappointed the Street with their June quarter numbers.

Why Morgan Stanley upgraded India: Key points

The global brokerage has upgraded India for the second time in four months. Earlier, on March 31, it had upgraded the domestic equities to equal weight from underweight. Morgan Stanley strategists have also upgraded India's industrial sector to Overweight. The financial and consumer discretionary sectors were already rated Overweight.

The strategists at Morgan Stanley note that in the last few years, the structural change brought about by India has started showing a positive impact. New growth opportunities are now being unlocked. A cut in corporation tax and the PLI scheme have helped reform supply-side policy. It added that the country's infrastructure will see expansion at a fast pace. The brokerage also added that the economy's regulation has become stronger now.

India Vs China

The August 2 note from the brokerage said that China's past could be India's future. By the decade-end, India's GDP growth of around 6.5 per cent is a possibility, the brokerage added. China's GDP growth rate, on the other hand, could be around 3.9 per cent. It added that those investors who participated in China's rally, which was led by the stimulus given by the Chinese government, should book profits.