India’s recent market cooldown may be a temporary phase rather than a reset. According to Morgan Stanley, stronger economic growth could help the country regain lost valuation ground and strengthen the investment case for Indian equities. The brokerage said the relative de-rating was largely due to the difference in India’s economic growth compared to the rest of the world, but expected the trend to reverse as growth picks up. “India’s relative de-rating is cyclical and with growth acceleration in the pipeline, it has the potential to reverse,” it said. Morgan Stanley said recent weakness in Indian equities as well as low foreign investor ownership could make the market ripe for a correction. According to the report, these factors may create a favorable backdrop for Indian stocks in the coming times.The report rejected the view that the decline in India’s valuation is structural. It said concerns about the country’s long-term growth prospects are exaggerated, including arguments that falling fertility rates could weigh on economic expansion and that artificial intelligence (AI) could hurt India’s services exports and trade.On demography, Morgan Stanley said the fertility decline has not been sudden and is expected to continue supporting economic growth over the next two decades, although it may gradually erode India’s long-term demographic advantage.It also said that AI may slow the pace of service exports in the near term, but in the medium term the technology offers an opportunity to improve labor productivity from India’s relatively low productivity base.The report said India’s long-term growth story rests on several structural forces, including a multi-polar global economy, which can help increase the country’s share in global goods trade, expand the consumer base and significantly increase investment.While the report said India’s economy has bottomed out and is on an upward trend, it said growth still lags some of the economies that are benefiting from the global artificial intelligence capital spending cycle.According to Morgan Stanley, the next direction of Indian markets will depend on how investors view the growth gap between India and the global economy. It said sentiment could improve if global AI-related capex enthusiasm wanes or India’s economic growth picks up further.The report also said investors will keep a close eye on the upcoming quarterly earnings season and said companies could deliver positive earnings surprises supported by strong high-frequency economic indicators.
