Brokerage firm Morgan Stanley has upgraded India to overweight as it believes the country is just at the start of a long wave boom at the same time as China is about to end one.

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The upgrade comes just four months after the brokerage had upgraded India to equalweight from underweight on March 31 citing a narrowing valuation premium and a resilient economy.

India has now become the core overweight market for Morgan Stanley within the Asia Pacific Ex-Japan and Emerging Markets basket. India's valuation premiums to Emerging Markets and China have moderated significantly from last October's high and are starting to rise again.

"We upgrade India to overweight for secular leadership. We see a secular trend towards sustained superior USD EPS growth versus Emerging Markets over the cycle with a young demographic profile supporting equity inflows," the note said.

India's future looks to a significant extent like China's past, Morgan Stanley's note said. The brokerage expects China's GDP growth to be around 3.9 percent at the end of the decade compared to India's 6.5 percent.

"Our call last October for the beginning of a new bull market in Asia / EM equities is increasingly priced with MSCI EM up 24 percent since the late October trough," Jonathan Garner of Morgan Stanley wrote in a note.

These are the things that have changed fundamentally in India, according to Morgan Stanley:

Structural reforms over the last few years which are now bearing fruit

Unlocking growth opportunities that were previously stagnant

Supply-side policy reforms like corporate tax cuts and PLI

Acceleration of infrastructure progress

Regulation and formalisation of the economy.

Key downside risks for the Indian market includes an upside surprise in inflation and monetary policies, especially if productivity improvement does not catch up. "Another concern is more structural, as AI may be disruptive for India's services export and the labor fource generally, although we will monitor the impact closely," Morgan Stanley's note said.

The brokerage has also upgraded India's industrials sector to overweight, along with the financials and consumer discretionary stocks, which are already an overweight for them. "We expect these three sectors will be the major beneficiaries of India's structural story," the note said.

Within the Asia-Pacific Ex-Japan focus list, Morgan Stanley has added Indian stocks like Larsen & Toubro and Maruti Suzuki, while Titan has been removed from the list. Both L&T and Maruti have also been added to the GEM focus list.

First Published:Aug 3, 2023 7:13 AM IST