India’s Market Valuation Dip Cyclical; Equity Recovery Likely: Morgan Stanley

New Delhi, Jul 6 (KNN) India's recent decline in market valuations is temporary rather than structural, and a recovery in economic growth could help reverse the trend and provide a boost to equities, according to a report by Morgan Stanley.

The report said the combination of subdued recent market performance and lower foreign investor ownership could create a favourable environment for Indian equities going forward. 

"India's relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse," Morgan Stanley said, arguing that concerns suggesting the valuation decline is structural are overstated, ANI reported.

Addressing Structural Concerns

According to the report, one argument for a structural de-rating is that India's long-term growth could slow due to a declining fertility rate, while another is that artificial intelligence could hurt the country's services exports and trade. Morgan Stanley said both concerns are exaggerated. 

It noted that while fertility rates are slowing, the change has not been abrupt and is likely to support economic growth over the next two decades, even as it gradually reduces India's long-term demographic advantage.

On artificial intelligence, the report said the technology could pose a near-term challenge to India's services export momentum, but over the medium term also presents a significant opportunity to improve labour productivity from the country's relatively low productivity base.

Structural Growth Drivers

Morgan Stanley highlighted that India's long-term growth outlook remains supported by several structural factors, including a multi-polar global economy that could increase India's share in global goods trade, a growing consumer base and a significant pickup in investments. 

The report noted that the decline in India's market valuation is mainly cyclical and reflects the gap in relative economic growth compared with the rest of the world.

Outlook

It emphasised that although India's economic growth appears to have bottomed out and is now moving higher, it still trails growth in some other economies, particularly those benefiting from the global artificial intelligence capital expenditure cycle. 

Morgan Stanley said the key trigger for Indian markets going forward will be how investors assess this growth gap, with sentiment likely to improve if optimism around global AI-related capital expenditure moderates or if India's economic growth accelerates further. 

The report noted that the upcoming quarterly earnings season would provide important signals for investors, with companies expected to deliver positive earnings surprises supported by strong high-frequency economic indicators.

(KNN Bureau)