Markets underestimating turn in growth cycle, says Morgan Stanley

India’s equity market may be underestimating the potential inflection point in the growth cycle, as current valuations do not fully reflect the nation’s improving macro fundamentals and imminent earnings recovery, foreign brokerage Morgan Stanley has said in a report.

The peak in earnings and equities lies ahead, not behind, supported by resilient domestic consumption, robust demographic trends, proactive policy reforms, and rising infrastructure investment, believes the US-headquartered firm.

Morgan Stanley sees a compelling case for a re-rating, driven by India’s increasing share in global output, stable fiscal and monetary frameworks, rising entrepreneurial class, enhanced social outcomes, and an improving capex cycle.

The commentary comes amid a backdrop of stark underperformance of the Indian markets relatively to their emerging market (EM) peers.

The MSCI EM Index has posted positive returns in all eight calendar months of 2025, climbing 17 per cent year-to-date (YTD). In contrast, Indian equity markets — which hold the third-largest weight in the EM gauge — fell for a second consecutive month in August and have advanced in only four of the eight months so far. YTD, the benchmark Nifty 50 is up less than 3 per cent, falling well behind the broader EM index.

This underperformance reflects, in part, foreign investors trimming exposure to Indian equities amid sluggish earnings growth that clashes with India’s premium price-to-earnings (P/E) valuations. Economic uncertainty has been further amplified by steep US trade tariffs on Indian exports, dampening investor confidence.

“High growth with low volatility, falling interest rates and low beta = higher P/E. This also supports the shift in household balance sheets towards equity and appears in the equity market in the form of a sustained bid on stocks. The low beta itself emanates from improved macro stability and the structural shifts in household balance sheets towards equities. Price action hides how much stocks have de-rated relative to long bonds, EMs, and gold and how India is gaining share in global GDP,” said Morgan Stanley equity strategists Ridham Desai and Nayant Parekh in a note on Monday.

The brokerage favours domestic cyclicals over defensives and external-facing sectors.

It has an overweight stance on financials, consumer discretionary, and industrials, underweight energy, materials, utilities, and healthcare.

“This is likely to be a stock pickers' market, in contrast to one driven by top-down or macro factors,” said the analyst duo.