India’s stock market returns are expected to improve in the coming months as several key fundamentals turn favourable, according to a report by Morgan Stanley.
The report noted that the past 12 months have seen the weakest market performance on record, while equity valuations are approaching earlier lows. For the first time in nearly five years, equity valuations have become more attractive than short-term interest rates.
According to the report, valuations, recent market performance, macroeconomic conditions, investor positioning, and the growth cycle all point towards better stock returns ahead. The firm’s modified earnings yield gap also indicates improving risk-reward conditions for equity investors.
“Valuations, trailing performance, the macro, positioning and the growth cycle all signal improving stock returns in the months ahead,” the report stated.
Morgan Stanley highlighted a clear pickup in growth momentum, with earnings growth expected to rise sharply as India’s growth cycle accelerates. This is likely to be supported by policy measures from the Reserve Bank of India and the government, including interest rate cuts, a cash reserve ratio (CRR) cut, banking reforms, and liquidity support.
Additional demand support is expected from front-loaded capital expenditure and nearly Rs 1.5 trillion in GST rate cuts, which are projected to mainly benefit mass consumption. Improving ties with China and China’s policy initiatives are also viewed positively, signalling a reversal of India’s post-COVID hawkish macro stance.
On the macroeconomic front, the report said conditions strongly favour equities. A steepening yield curve, improving money supply dynamics, nominal growth outpacing interest rates, and an undervalued rupee form a combination that has historically supported strong equity returns.
Investor positioning was cited as another supportive factor. Foreign portfolio investor exposure has weakened over the past four years, increasing the possibility of a “pain trade” that could push markets higher.
Morgan Stanley also sees scope for a market re-rating, driven by lower oil dependence, a higher share of exports—particularly services—and continued fiscal consolidation. These factors, along with lower inflation volatility, are expected to result in structurally lower real interest rates and reduced economic volatility in the years ahead.
-ANI
