Morgan Stanley boosts India to ‘Overweight’, but downgrades China.

According to Morgan Stanley, they have recently upgraded India to an ‘overweight’ rating due to several factors. One of the key reasons is the secular trend towards sustained superior dollar EPS (earnings per share) growth in comparison to other emerging markets throughout economic cycles. Additionally, India’s young demographic profile is seen as a crucial factor supporting equity inflows.

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The upgrade also takes into consideration India’s relative valuations, which are considered less extreme compared to October’s figures. Moreover, India’s ability to leverage multipolar world dynamics is seen as a significant advantage.

The brokerage note highlights that India’s macro indicators remain resilient and the economy is on track to achieve their forecasted 6.2% GDP growth. The country has been benefiting from a surge in inward foreign direct investment, with firms from the U.S., Taiwan, and Japan showing interest in India’s large domestic market and improved export infrastructure, including more efficient ports, roads, and electricity supply.

On the other hand, MSCI China has been downgraded to ‘equal-weight’ by Morgan Stanley due to concerns over growth and valuation. The research firm points out that still-negative earnings revisions and weak return on equity (ROE) and profit margins undercut the cheap valuations of the Chinese market.

Morgan Stanley’s experts believe that India’s future economic trajectory shares similarities with China’s past development. They predict that India’s GDP growth trend will likely be 6.5% until the end of the decade, while China’s growth is projected to be 3.9%.

One of the key drivers of India’s growth potential lies in its favorable demographic trend, in contrast to China, which has experienced a decline in its working-age population since the early part of the last decade.

Ridham Desai, managing director at Morgan Stanley India, emphasizes that India has undergone significant changes in less than a decade. These include supply-side policy reforms such as infrastructure development, formalization of the economy through GST and IndiaStack, changes in real estate regulations, digitalization of social transfers, a new bankruptcy law, and reduced corporate balance sheet leverage. Other contributing factors include flexible inflation targeting, increased focus on foreign direct investment, and encouraging domestic investment through various initiatives. All of these have shaped India’s growth story and contributed to its potential as an attractive investment destination.

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