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

Indian stock market offers a compelling long-term investment opportunity amid heightened global uncertainty, Morgan Stanley said. The firm sees India as a relative outperformer even in a challenging global macro environment, backed by robust domestic fundamentals and structural drivers of growth.

In its latest equity strategy report, the global brokerage maintains a constructive view on India, pegging its BSE Sensex target at 89,000 by June 2026. In a more optimistic bull-case scenario, the firm forecasts the Sensex could touch the 1 lakh mark.

Morgan Stanley argues that the Indian equity market has shown remarkable resilience since September 2024, digesting multiple layers of negative news — ranging from corrections in small- and mid-caps (SMIDs) to India-Pakistan war. Despite this, large-cap indices are within 5% of their all-time highs.

The brokerage firm notes that while headline indices have held up, Indian equities have meaningfully de-rated in relative terms — whether against long bonds, gold, or India's share in global GDP — thereby opening up valuation comfort for long-term investors.

Fundamentals Remain Strong

The report outlines several macro and structural strengths that underpin the India growth story:

Macro Stability: India continues to benefit from favourable terms of trade, a falling primary deficit, and low inflation volatility.

Corporate Earnings: Aided by a pickup in private capex, balance sheet releveraging, and rising discretionary consumption, earnings are expected to grow at mid-to-high teens CAGR over the next 3–5 years.

Retail Flows: Domestic investors remain a steady source of capital, even during recent market sell-offs, indicating structural depth in the investor base.

Geopolitical Tailwinds: India’s new doctrine on terrorism and a surprisingly strong military response have reinforced confidence in the country’s internal security and strategic readiness.

Undervalued by Foreign Investors: Morgan Stanley notes that foreign portfolio positioning in India is at its weakest level since 2000, although early signs of a shift in sentiment are emerging.

Moreover, catalysts that could drive sentiment include dovish moves by the RBI, GST rate cuts, progress on a trade deal with the US, and better-than-expected growth data.

Portfolio Strategy: Prefer Domestic Cyclicals

Morgan Stanley recommends an overweight stance on domestic cyclicals over defensives and external-facing sectors, with a preference for financials, consumer discretionary, and industrials. The brokerage remains underweight on energy, materials, utilities, and healthcare.

The brokerage sees this as a “stock pickers’ market”, driven more by company fundamentals than by top-down macro narratives. It is agnostic to market capitalization in its approach but notes that average active positions are relatively conservative at 80 basis points, reflecting current global uncertainties.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.