Indian equities are expected to experience significant growth in the upcoming years, as per a report by Morgan Stanley. Despite recent underperformance compared to emerging markets, the report highlights improving earnings growth, increasing investments, and favorable macroeconomic conditions that are strengthening the long-term outlook for the domestic stock market.
Morgan Stanley analysts Ridham Desai and Nayant Parekh mentioned in a strategy note that Indian equities have shown their weakest trailing 12-month relative performance against emerging market peers on record. However, the report emphasizes that the market’s underlying fundamentals remain strong and could potentially lead to substantial returns throughout the decade.
One of the major challenges identified for Indian equities is the absence of a direct artificial intelligence (AI)-linked market theme. This is particularly significant as global capital flows are increasingly favoring AI infrastructure, semiconductor, and technology-heavy markets. The analysts noted that the lack of a direct AI play poses a persistent challenge to the equity market.
While expressing concerns about the potential disruption AI could bring to India’s IT outsourcing industry, which is closely tied to global technology spending trends, Morgan Stanley also highlighted the country’s potential to benefit from AI-driven productivity gains due to its relatively low labor productivity base. The report suggests that Indian IT services firms could play a crucial role as global companies turn to them for building AI applications and solutions.
Despite the recent weaker performance of Indian equities, Morgan Stanley pointed out several positive signs that are starting to emerge. The brokerage observed that 12-month rolling corporate buybacks are approaching record levels and are expected to surpass nearly $10 billion on a trailing basis. Additionally, valuations have become more reasonable, with MSCI India currently trading at a price-to-book multiple of 3.4 times, historically corresponding to predictable 10-year forward annual returns of around 11 percent.
