What makes Morgan Stanley believe Indian markets to continue bull rally; lists 5 key triggers - what should investors know?

The Indian markets are likely to continue its bull rally going forward on the back of multiple triggers, which include returning of foreign investors to Indian equities, a domestic brokerage firm Morgan Stanley said in its report while explaining the key factors.

The ongoing bull market in India is underpinned by years of policy effort to boost equity saving via inflation targeting, permitting retirement funds to invest in stocks, and promoting systematic investing leading to a persistent domestic bid on stocks, the brokerage said

The policy effort will also boost corporate profit share in GDP via tax cuts, GST implementation and production-linked incentive schemes among other measures leading to a mean reversion in earnings, Morgan Stanely added in its report while highlighting the fundamentals.

The market is also aided by the increased FDI flows through easing of doing business steps and revenue incentives, the brokerage said, adding that the share of FDI in BoP has allowed India to run a monetary policy that is less driven by the US Fed, reducing the market’s sensitivity to US growth conditions and oil prices.

Triggers Ahead:

* Upside surprise to CAPEX will further boost earnings and make valuations cheaper than the markets appear.

* Potential US recession which will have a concomitant negative effect on earnings and FDI or BoP and keep correlations of returns between Indian and global equities elevated.

* Increase in equity limit for retirement funds adding to the domestic bid.

* India’s inclusion in global bond indices and commodity prices is linked to the ongoing conflict in Ukraine.

*Strengthening of the FPI bid as India continues to gain attention.

The Indian market's valuations are certainly rich, especially on a relative basis and sentiment is neutral which means absolute returns are likely to remain modest as they have been since October 2021, the brokerage also mentioned.

It pointed out that the correlations across stocks may have made a trough but continue to signal a market driven by macro warranting wider sector positions.

Morgan Stanley gives an Overweight rating on Financials, Technology, Consumer Discretionary, and Industrials and Underweight on all other sectors. It prefers Small caps over Large caps as growth may remain relatively strong.