Morgan Stanley stays tactically underweight on India stocks. Here’s one sector it is bullish on
Morgan Stanley said it is underweight on India equities from tactical and valuation perspectives, and expects the domestic market to lag any initial recovery in the broader emerging market region.
“But we look for entry points into a compelling structural outlook,” it said in a note on November 13.
Morgan Stanley downgraded India rating on October 4 to a relative underweight (UW), due to record relative valuation premia and its preference for early-cycle recovery markets, Korea and Taiwan.
“India has moved up from #28 to #23 in our APxJ/EM market allocation framework, but we remain UW, given relative valuations are between 2.0 and 3.3 standard deviations more expensive vs the region, while earnings estimate revisions remain negative and the RSI is extended,” it said.
That said, Morgan Stanley said it shares its India Strategy team’s view that the extraordinary returns over the past two years have been underpinned by a foundational reform agenda enacted over the last five years.
This, Morgan Stanley said, sets the stage for India’s macro-stability amidst the DM inflation/policy shock of 2022 and a compelling bottom-up economic and profit growth opportunity, it said.
The brokerage has remained overweight (OW) on India financials while it has upgraded domestic industrials and utilities to equal-weights. The brokerage has downgraded healthcare sector to underweight.
“We hold ICICI and Hindustan Aeronautics in our APxJ and GEM Focus Lists and remain OW India Financials in our sector allocation, but have moved UW India Healthcare on relative valuations,” it said.
Morgan Stanley said it has downgraded India’s Healthcare sector due to unattractive valuations and deep downward earnings revisions.
“However, we have upgraded India Industrials and India Utilities to equal-weight and continue to recommend investors hold OW positions on India Financials in regional portfolios,” it said.
On the passive flow front, India doubled its index weight since October 2020 and is now the second-largest market in MSCI EM. This trend may continue given the structural potential that is being unlocked by reforms and infrastructure investments (both physical and digital), Morgan Stanley said.
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