Market strategy: Indian equities inexpensive, poised for long-term gains: Morgan Stanley; OW on financials, industrials

Market Strategy: Indian Equities Inexpensive, Poised for Long-Term Gains, Says Morgan Stanley; OW on Financials, Industrials

June 5, 2025 | Mumbai

Global brokerage Morgan Stanley has reiterated its bullish stance on Indian equities, stating that valuations remain attractive in the long-term, particularly in sectors like financials and industrials. In its latest market strategy note, the investment bank emphasized that India continues to be a key overweight (OW) market in its global emerging markets portfolio, citing macroeconomic resilience, policy stability, and improving earnings visibility.

Valuations Still Reasonable Despite Market Rally

Indian stock markets have seen a significant uptrend in 2024–2025, with benchmark indices like the Sensex and Nifty 50 climbing to record highs. Despite the rally, Morgan Stanley argues that Indian equities remain relatively inexpensive when measured against long-term growth prospects and risk-reward potential.

"We believe India is at the beginning of a long-term structural bull market," said Ridham Desai, Chief Equity Strategist for India at Morgan Stanley. "The valuation premium versus other emerging markets is justified by higher return on equity, policy continuity, and robust domestic demand."

The brokerage maintains that Indian stocks are trading at a forward P/E multiple of around 18–19x, which is not excessive given double-digit earnings growth projections over the next 3–5 years.

Strong Structural Story: Domestic Demand, Policy, and Reform

Morgan Stanley highlighted three structural pillars supporting India's long-term market narrative:

1. Robust Domestic Consumption: With a rising middle class, urbanization, and increasing per capita income, domestic consumption remains the engine of India's growth.

2. Pro-Business Policy Framework: Continued reforms in taxation (GST), manufacturing (PLI schemes), and digital infrastructure signal a business-friendly environment.

3. Political Stability: A stable central government provides policy continuity, which has historically translated into sustained investor confidence.

The report also noted that India’s inclusion in global bond indices and a likely upward revision in sovereign ratings could provide further inflows and market support.

Overweight on Financials and Industrials

Morgan Stanley is particularly optimistic about two sectors: financials and industrials.

• Financials: The firm believes Indian banks are entering a multi-year credit upcycle, aided by improved asset quality, strong balance sheets, and tech-driven operational efficiency.

  “We expect earnings growth in the financial sector to outpace the broader market, with private banks showing the strongest resilience and upside,” said the report.

• Industrials: With capex picking up, public and private investments increasing, and strong order books in infrastructure, engineering, and capital goods, industrials are poised for sustained outperformance.

  “India’s manufacturing push under ‘Make in India’ and the PLI scheme is translating into real capex and earnings. We remain bullish on this space for the next decade,” the note added.

FPI Flows, Macro Stability Supporting Sentiment

Foreign Portfolio Investors (FPIs) have turned net buyers in 2025, reversing the outflows seen in 2022–2023. Net inflows into Indian equities have crossed ₹1.5 lakh crore year-to-date, as per NSDL data, driven by better macro stability, favorable currency outlook, and growth visibility.

India’s GDP grew at 7.6% in FY25, and inflation has been under control, with the RBI expected to maintain a neutral to accommodative stance going forward. This combination of growth and stability is helping sustain investor appetite.

Risks to Watch: Global Volatility and Domestic Politics

While the long-term outlook remains constructive, Morgan Stanley flagged a few risks that could temporarily impact sentiment:

• Global Rate Cycle: Any hawkish surprise from the U.S. Federal Reserve or global central banks could affect capital flows.

• Geopolitical Tensions: Escalation in the Middle East or Taiwan Strait could disrupt markets globally.

• Election-Driven Uncertainty: Though Morgan Stanley remains confident about policy continuity, state and central elections in 2026 could create short-term volatility.

Investor Outlook: “Buy the Dips” Strategy Advised

The brokerage recommends a “buy-on-dips” approach for investors looking to enter or expand their India allocation. It suggests a diversified portfolio tilted toward cyclicals, financials, and manufacturing-related names while staying selective in consumer and IT sectors.