Morgan Stanley has maintained its optimistic outlook on Indian stocks, undeterred by potential volatility in the election year. In a recent podcast episode, Jonathan Garner of Morgan Stanley not only reaffirms India's standing as the preferred choice for investors but also anticipates a fourth consecutive year of outperformance against China in 2024.
Presently, MSCI India is on track to outperform MSCI China for the third straight year, maintaining its status as Morgan Stanley's largest overweight at 100 basis points compared to the benchmark. In contrast, China has been downgraded to equal weight since the summer of 2023, setting the stage for a continued trend of Indian dominance in the coming year.
This sentiment is echoed by other market participants. According to Yury Zusman, a London-based emerging market strategist and author of the weekly research EM Dynamics, "India continues to exhibit key themes of sustained growth outperformance, positioning itself as a 'defensive' emerging market."
The driving force behind Morgan Stanley's bullish stance on India lies in the trajectory of earnings growth. Since early 2021, MSCI India's earnings per share in US dollar terms has surged by an impressive 61%, while MSCI China experienced a decline of 18%. This period marks the most significant outperformance of India's earnings relative to China in the modern history of these two equity markets.
The investment bank highlights two fundamental factors favoring India, which are expected to persist into 2024. Firstly, India's relative economic growth, particularly in nominal GDP terms, stands in stark contrast to China's persistent challenges with debt, deflation, and demographics. While China anticipates a subdued 5% nominal GDP growth in 2024, India is forecasted to experience double-digit growth, fueled by robust aggregate demand and supply dynamics.
The second factor is currency stability. The investment bank’s FX team anticipates continued Rupee stability for India, thanks to prudent macro management. In contrast, the real effective exchange rate for the Chinese Yuan has started to decline, driven by negative foreign direct investment flows and increasing domestic capital flight.
On the flip side, the market is bracing for a potential uptick in volatility as India approaches the election year.
“As elections loom, investors should be attentive to post-election policy stability,” notes Zusman in his weekly research. “Additionally, the impact of a high oil price on India's economic trajectory adds a layer of risk.”
Despite concerns regarding the volatility of Indian markets in an election year and ongoing discussions about relative valuations, Morgan Stanley holds a positive outlook on India's corporate returns.
“We expect ROE to remain high as earnings compound going forward, and corporate leverage can build from current levels as nominal and real interest rates remain low to history,” says Garner.
In contrast, the outlook for China presents a different scenario, with a bear case by Morgan Stanley projecting a potential further decline in ROE to around 7% over the medium term, less than half that of India today.
The investment bank stays overweight on India, particularly in financials, consumer discretionary, and industrials. For China, the focus shifts to A-shares and niche technology, hardware, and clean energy plays which align with China's policy objectives.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
