Stock Picker’s Market Expected as Fundamentals Improve
Global brokerage firm Morgan Stanley has expressed confidence in India’s stock market recovery in 2025, expecting it to regain lost ground against its global peers. The firm anticipates a stock picker’s market, where individual stock selection will be crucial for investment success. Despite the recent downturn, fundamentals are improving, though they are not yet fully reflected in valuations.
Morgan Stanley’s latest report suggests that India’s earnings growth is rebounding, and its market valuation remains the most attractive since the COVID-19 pandemic. The firm believes that investors have overlooked positive macroeconomic developments, including the Reserve Bank of India’s (RBI) policy pivot and a strong Union Budget, both of which could play a critical role in India’s market resurgence.
Indian Markets Poised for Growth Despite Global Uncertainty
Morgan Stanley’s analysis emphasizes that India’s low-beta nature makes it a resilient market amid global uncertainties. The brokerage firm asserts that India is a strong buy candidate in the current economic environment.
Highlighting Factors Supporting India’s Market Strength:
- Earnings Growth: Even the most conservative consensus forecasts indicate that India’s relative earnings growth is improving.
- Attractive Valuations: The market is trading at its most attractive valuation levels since the COVID-19 pandemic, creating an opportunity for long-term investors.
- Ignored Positive Developments: Investors have not fully accounted for RBI’s monetary policy adjustments and government fiscal policies aimed at boosting economic growth.
- Resilience Amid Macroeconomic Uncertainty: The market has shown strength, making it a safer bet for long-term investment.
Sector-Wise Investment Outlook: Favoring Cyclicals Over Defensives
Morgan Stanley expects cyclical stocks to outperform defensive stocks in the upcoming market recovery. The firm has adjusted its sector preferences, highlighting investment opportunities in small-cap and mid-cap stocks over large-cap stocks.
Morgan Stanley’s Sector Preferences:
Overweight Sectors:
- Financials (banks and NBFCs expected to benefit from economic expansion)
- Consumer Discretionary (spending expected to rise with improving economic conditions)
- Industrials (infrastructure push, manufacturing growth)
- Technology (IT services, digital economy investments)
Underweight Sectors:
- Defensive sectors such as FMCG, healthcare, and utilities may underperform as investors rotate into cyclical stocks.
India’s Economic Expansion to Drive Market Recovery
Morgan Stanley remains bullish on India’s long-term economic prospects, expecting the country to gain a larger share in global GDP over the coming decades.
Key Growth Drivers for India’s Economy:
- Demographic Advantage:
- India’s large and young population will contribute to sustained economic growth.
- Stable Political and Economic Environment:
- A stable democracy and macro stability are expected to attract foreign and domestic investments.
- Infrastructure Development:
- Government-led infrastructure projects will spur industrial and economic growth.
- Rise in Entrepreneurship and Startups:
- India’s startup ecosystem is expanding, leading to innovation-driven economic growth.
- Credit Expansion:
- The credit-to-GDP ratio is expected to rise, supporting business growth and consumer spending.
- Manufacturing Growth:
- The Make in India initiative and PLI (Production-Linked Incentive) schemes will boost domestic manufacturing.
India’s GDP Growth Forecast and Economic Policies
Morgan Stanley projects India’s GDP growth at 6.3% in FY25 and 6.5% in FY26. The firm expects a gradual recovery in service exports and continued fiscal and monetary policy support to drive economic expansion.
Factors Driving India’s GDP Growth:
- Monetary Policy Support: RBI’s accommodative stance is expected to fuel credit growth.
- Fiscal Policy Measures: The government’s expansionary budget will drive infrastructure and capital expenditure.
- Strong Consumption Growth: Rising disposable income will support demand for consumer goods and services.
Morgan Stanley expects that macro stability will remain within a comfortable range, providing policymakers with the flexibility to support economic expansion as required.
Stock Market Trends: Recovery in Sight for India Inc.
The brokerage firm anticipates a rebound in corporate earnings, with the current quarter potentially delivering upside surprises. Morgan Stanley believes that valuations remain attractive across different market segments, offering investors opportunities for long-term wealth creation.
Market Trends to Watch:
- Earnings Growth to Rebound: After a slowdown in H2 2024, Indian corporations are expected to deliver better earnings performance in 2025.
- Attractive Valuations for Investors: With the recent market correction, Indian equities are trading at compelling valuation levels.
- Banks Expected to Lead: The financial sector remains Morgan Stanley’s top pick, driven by rising credit growth and economic expansion.
- Consumer Discretionary and Industrials to Gain: Increased consumer spending and government-led infrastructure projects will drive these sectors higher.
India’s Market Positioned for Global Investment Inflows
Morgan Stanley believes that India is set to become one of the most sought-after markets for global investors. The firm highlights that foreign institutional investors (FIIs) are likely to return, as India’s long-term economic trajectory remains strong.
