Mumbai

Global brokerage Morgan Stanley has turned constructive on Indian equities, arguing that the recent underperformance and valuation de-rating of domestic markets are cyclical and set to reverse as economic growth accelerates.

"We argue India's relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse," the brokerage said in its latest India Equity Strategy Playbook released on July 6. It added that with "depressed trailing performance and foreign ownership, this could be very positive for equities going forward."

Morgan Stanley expects India to remain a defensive growth market, supported by macro stability, improving investment activity and robust domestic liquidity. The brokerage projects India's investment-to-GDP ratio to rise to 37.5 per cent over the next five years, aided by an undervalued currency, moderate real interest rates and fiscal stability.

The brokerage has set a June 2027 target of 89,000 for the BSE Sensex, implying an upside potential of around 15 per cent from current levels. According to Morgan Stanley, the base-case scenario assumes continued gains in macro stability, higher private investment and a positive gap between real growth and real interest rates.

The report noted that the market's next leg of movement would largely depend on how investors assess the growth differential between India and the rest of the world. "India's growth looks to have bottomed and is now trending higher," it said, while also expecting the upcoming earnings season to deliver an upside surprise on the back of strong high-frequency indicators.

Morgan Stanley believes the backdrop for equities remains compelling, citing "broad-based growth acceleration, robust domestic equity flows, a nascent IPO pipeline, the weakest-ever trailing 12M relative performance, relative valuations at all-time lows and foreign positioning at multi-year lows."

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Sectorally, the brokerage prefers domestic cyclicals over defensives and externally oriented sectors, maintaining an overweight stance on financials, consumer discretionary and industrials, while remaining underweight on energy, materials, utilities and healthcare.