India's Next Market Phase — Morgan Stanley

ELI5 / TLDR

Two Morgan Stanley strategists debrief their Mumbai investor forum. The core tension: India is still growing, but everyone else — Korea, Taiwan, Japan, the US — just grew faster on earnings, so foreign money has drifted elsewhere. India now trades at its cheapest relative valuation in 35 years of MSCI data, which the house frames as a setup, not a problem. Their preferred sectors are financials, industrials, and consumption, with IT services as a wildcard.

The Full Story

The two-speed forum

The first observation is about who showed up and how they behaved. Domestic Indian investors were hunting for the next stock. Foreign investors stayed home, or stayed cautious.

Domestic investors look that they are bullish and foreign investors continue to stay rather cautious on the Indian markets.

That split frames everything else in the conversation. India isn’t unloved by Indians. It’s been deprioritised by the rest of the world.

The relative-growth problem

The macro data inside India looks fine. Bank credit growing 17.7% year-on-year. Passenger vehicle sales up 27% in May. These are the two cyclical dials Chetan Ahya watches, and both point up.

The trouble is comparison. India’s first-quarter earnings grew 13%. In the same quarter, Korea grew 170%, Taiwan 48%, Japan 33%, the US 27%. When the menu has those numbers on it, 13% stops looking like growth and starts looking like an opportunity cost. Money that is short-term oriented — which is most money — chases the next quarter or two, and right now the next quarter or two belong to North Asia.

Ridham Desai’s counter is a duration argument. Equities, he says, are a long-duration asset, and over the long run only terminal growth matters.

I don’t really think India’s terminal growth has moved much. It remains far superior to a lot of other countries around the world.

So the pitch is: the relative-growth disadvantage is real but temporary (three or four quarters), and meanwhile India is the cheapest it has been against the world in the entire MSCI record. Cheap plus a recovering earnings line — March-quarter broad-market earnings doubled over the December quarter — is the setup.

The policy nudge

As the forum wrapped, policymakers moved. They withdrew withholding tax on debt investors and gave banks an incentive to take on more dollar borrowing. Desai rates these among the year’s most important actions — but with a sharp caveat about what they fix.

That said, these measures may not help the equity flows because the equity flows, I think, are going to depend on the relative growth situation.

Translation: the debt measures should pull money in over the next 12 months and steady the rupee (India has been running a balance-of-payments deficit). Equity flows, though, won’t budge on tax tweaks. For foreigners to come back to Indian stocks, one of two things has to happen — growth elsewhere has to slow down, or India has to open a big IPO cycle, because primary issuances are where foreigners actually write cheques.

Ahya’s longer-term worry sits underneath all this: AI threatens India’s services exports, so the country needs its manufacturing sector to become genuinely competitive and pull in foreign direct investment. The government, he says, is “on it” but “more action [is] needed.”

The capex super-cycle

Ahya’s structural thesis is an Asia-wide capex boom built on four pillars: AI and digital infrastructure, energy, defence, and industrial onshoring. India is spending across all four, energy especially. The catch — and it is an honest one — is that North Asia both spends on capex and sells the capital goods, so Korea, Taiwan, Japan and China capture the export upside too. India mostly gets the domestic-growth and productivity benefit, not the export windfall.

Where to look

On sectors, Desai leads with financials, and the logic is clean. Bank balance sheets are in “pristine condition,” the rate cycle has troughed so margins have bottomed, and credit is accelerating. If the capex cycle plays out, financials gain the most — and valuations are still reasonable.

Beyond banks, he points straight at the capex beneficiaries: energy, semiconductors, fertilizers, data centres, aerospace — with a warning that the market has already priced some of these. Consumption is the structural favourite, and his framing of it is the most memorable thing in the episode:

The 1.5 billion people in this country are split across say a 150 cohorts of 10 million each… depending again on what you are selling to your consumer, India could be between 10 and 100% of your revenue growth.

The wildcard is IT services — the sector AI is busy disrupting. Confusing now, but Desai thinks once the dust settles it could become one of the more interesting places to be.

Key Takeaways

India trades at its lowest relative multiple versus the world in 35 years of MSCI index history — the central valuation claim of the episode.
Q1 earnings growth, by region: Korea 170%, Taiwan 48%, Japan 33%, US 27%, India 13%. India’s underperformance is relative, not absolute.
Domestic cyclical data is strong: bank credit +17.7% YoY, passenger vehicle sales +27% in May.
March-quarter broad-market earnings roughly doubled over the December quarter — the trajectory is inflecting up.
New policy: withholding tax on debt investors removed; banks incentivised toward dollar borrowing. Aimed at debt flows and rupee stability (India runs a BoP deficit), not equity flows.
Equity flows from foreigners need one of two triggers: growth slowing elsewhere, or a major Indian IPO cycle (primary issuance is where FPIs buy).
Capex super-cycle has four legs: AI/digital infra, energy, defence, industrial onshoring. India spends across all four but, unlike North Asia, doesn’t export capital goods — so it captures growth, not export upside.
Preferred sectors: financials (banks in a “sweet spot” — troughed rates, bottomed margins, accelerating credit), industrials, consumption. IT services flagged as the post-AI “dark horse.”
House view: investors are “not positioned at all,” so India could be a strong market over the next 12 months if sentiment turns.

Claude’s Take

This is a sell-side house view delivered as a podcast, so read it for what it is: Morgan Stanley is structurally long India and this is the polished version of that stance. The tells are familiar — every soft data point gets a bullish gloss, and the bear case (relative growth) is acknowledged precisely so it can be reframed as cheapness. “Investors are not positioned at all” is the classic squeeze setup that book-talkers reach for.

That said, the analysis underneath is more honest than most sell-side India cheerleading. The relative-growth framing is genuinely useful and not flattering to India — 13% next to Korea’s 170% is a real reason foreigners have stayed away, and Desai doesn’t pretend otherwise. The distinction between debt flows (helped by the tax change) and equity flows (not helped) is a sharp, non-obvious point. And Ahya’s admission that North Asia captures the capital-goods export upside while India only gets domestic benefit is the kind of caveat the book-talking version would have buried.

The one claim to hold lightly is “lowest relative multiple in 35 years.” It’s almost certainly true as stated, but a relative multiple can stay low for a long time if relative growth stays low — cheapness is a reason, not a catalyst. Desai basically concedes this when he says equity flows depend on growth elsewhere decelerating or an IPO cycle, neither of which Morgan Stanley controls. So the actual conviction here is “cheap and waiting” rather than “cheap and about to move.” Useful texture, no hard catalyst.

Score 6: well-argued, candid about the bear case for sell-side, but it’s a 13-minute house-view podcast with no proprietary call you couldn’t reconstruct from the firm’s published notes.