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Morgan Stanley says Indian stocks are ‘attractive’ compared to other emerging markets

 


A guard walks past the National Stock Exchange building in Mumbai, India, Feb.9, 2018.

Danish Siddiqui | Reuters

SINGAPORE Indian stocks have outperformed other emerging markets for nearly six months and could continue to do so if supportive measures are in place, according to Morgan Stanley.

The outperformance started in April, but the short-term performance of the market remains tied to global factors, the US investment bank said in an Oct.9 report.

“We argued that for this outperformance to be sustainable, India must continue to implement a policy that elevates India’s growth potential in the eyes of market participants,” said Ridham Desai, equity strategist, and Sheela Rathi, equity analyst, in the report. .

the MSCI India Index, which focuses on large and mid-cap segments, is up 39.36% between mid-April and October 14 against a 26.7% increase in the MSCI Emerging Markets Index, according to data from Refinitiv Eikon. Meanwhile, the more narrowly focused Indian stock indexes Sensex and Nifty 50 are up 34.28% and 34.12% respectively.

Three factors contributed to India’s good performance: an improving political environment, the response of businesses to the pandemic and “an attractive starting point for assessments,” the bank said.

Morgan Stanley said differentiated policies such as a significant reduction in corporate taxes, recent changes labor law and agricultural marketing as well as manufacturing incentives contributed to India’s performance.

Businesses have also responded to the pandemic with measures that have put them in a better position before a recovery. “Indian companies have used pandemic disruptions to prepare for the next cycle of growth by cutting costs (profits exceeding expectations), raising capital to spur growth or mitigating tail risks, and undertaking mergers, acquisitions and restructuring, ”analysts said.

Finally, valuations look attractive relative to other emerging markets, as well as India’s own macro factors such as GDP and money supply. However, relative to bond yields, Indian stocks appear fully priced and may not be as attractive.

Indian traders at the office of Motilal Oswal Financial Services Ltd. in Mumbai, India.

Vivek Prakash | Bloomberg | Getty Images

Choice of sector

Morgan Stanley said the broader market looks very attractive and likes mid-cap companies.

“We are in a stock selection market and therefore recommend reducing sector positions. We believe that
the broader market is likely to outperform, consistent with our theme that this is a stock selection market, “analysts said.” We prefer cyclicals over defensives. Themes we love include farming, manufacturing, and early-cycle rate games. “Cyclical stocks are those that follow the strength of the economy and follow wider economic cycles, while defensive stocks are those that provide consistent dividends, regardless of the state of the market as a whole.

Here are the bank’s investment calls for different sectors.

Note “Overweight”:

  • Consumer discretionary;
  • Industrial; and
  • Energy.

With attractive valuations, analysts said consumer discretionary could be the first sector to emerge from the recession, aided by a possible fiscal and monetary stimulus. Consumer discretionary companies typically produce non-essential or luxury goods.

To be clear, economists said the government had little room for fiscal stimulus that could stimulate a recovery by restoring consumer demand without worsening the budget deficit. Inflationary pressures are also likely to limit Indian Reserve Bank’s short-term options

As to why his bullishness on energy stocks, Morgan Stanley says the sector “bears the hallmarks of a bull market leader by being unloved, under-owned and undervalued.”

Some of the individual names Morgan Stanley says he’s overweight on include: Bharti Airtel, Bajaj Auto, Bajaj Finance, Maruti Suzuki India, Reliance Industries, HDFC Bank and Apollo Hospitals.

Rating of “ underweight ”:

  • Technology; and
  • Consumer products.

Tech stocks are “the least exposed to a pickup in growth in India” and valuations are already relatively wealthy, the return on investment said.

Morgan Stanley predicted that financials could lose their leadership status in any new bull market due to over-ownership and that non-banks face a significant slowdown in growth. “We believe a stimulus package is essential, but the performance of the sector may be limited to a handful of strong banks. We are selling a rally in financials,” the bank said in a note released before the announcement. India’s tax measures on Monday.

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