Morgan Stanley’s stock analysts for Asia-EM markets have upgraded India to equal-weight (EW), citing narrowing valuation premiums and a resilient economy. They are especially bullish on the country’s financial and consumer-discretionary industries.

Meanwhile, they stay overweight (OW) on China, Korea and Taiwan, believing that these economies will outperform in the early stages of a bull market, as they have in the past. They also see supportive government policies, a low base effect and a de-escalation of tensions with the United States working to China’s advantage.

“India has underperformed since the end of October and the valuation premium to EM has narrowed significantly, though it stays at a premium to LT (long-term) history… We are bullish on India’s structural growth outlook, driven by a lending boom enabled by digital infrastructure, demographics, domestic demand and improving FDI,” they stated in their most recent strategy report.

Strategists think that inflation in the country has peaked and thus anticipate a dovish move by the Reserve Bank of India (RBI) in April, with a rate hike of 25 basis points. They also expect the consumer price index (CPI) to soften as oil costs fall. “The external macro environment is less challenging for India, given potential relief from energy costs and a weaker US dollar,” they added.

Upasana Chachra, Chief India Economist at Morgan Stanley, sees a recovery in the rural economy, with reopening and improved labour markets and trade conditions.

The strategists think that, while the risk from weakness in developed markets (DM) is significant, it is limited. They were using exports to GDP ratios (12M trailing sum) of 2 per cent to the US and 3 per cent to the EU, as well as projected revenue exposure to the US (10 per cent) and Developed Europe (7 per cent).

Investors may be sceptical of the India growth narrative, according to the strategists, because “progress has been somewhat disappointing in the last decade.” However, they added that circumstances have changed.

“The first is a shift to more supportive government policy, which will raise wages and spur increases in corporate profits as a share of GDP, as the latter has proven to be an effective way to boost real growth. Corporate tax cuts, increased focus on infrastructure improvement, sector deregulation and increased privatisation are all key reform actions to address key concerns,” they wrote.

“These factors, combined with cleaner corporate and financial sector balance sheets, should help unleash a new capex upcycle, likely fostering a new wave of loan growth. The introduction of Adhaar, a universal ID for all Indians, should facilitate financial transactions and increase digital penetration,” they added.