Morgan Stanley upgrades India to ‘overweight’, downgrades China

NEW DELHI: Morgan Stanley has revised its stance on Indian markets, upgrading them from “equal weight” to “overweight.” In contrast, the US-based investment bank has cut its rating on Chinese stocks to “equal weight”

According to a note released on Wednesday, India has now climbed to the top spot as the most-preferred market among emerging markets (EMs), rising from the sixth position. This rise is attributed to factors such as supportive foreign inflows, macro stability, and a positive earnings outlook.
Morgan Stanley analysts expressed their belief in a consistent trend of sustained superior earnings per share (EPS) growth in India compared to other emerging markets over the economic cycle. They also noted that the country’s young demographic profile is contributing to increased equity inflows.

Regarding specific sectors, the brokerage remains overweight on financials, consumer discretionary, and industrial segments in India. Furthermore, they assigned an “add” rating to Larsen & Toubro and Maruti Suzuki India on their Asia Pacific focus and Global Emerging Markets lists.
The situation in Indian markets is in stark contrast to that of China, where the country appears to be at the beginning of a long-wave boom while China may be reaching the end of one. Based on this assessment, the analysts believe it is appropriate to upgrade India to an “overweight” rating and downgrade China to “equal weight,” given India’s outperformance and the potential for a structural shift in favor of India.
In the past few days, Chinese assets have experienced a boost, thanks to several promises made by Beijing to stimulate economic growth and revitalize the struggling private sector. However, analysts at the bank caution that these measures are likely to be gradual and may not be sufficient to sustain the gains in the stock market.
The report highlights that market sentiment is now refocusing on the structural challenges faced by the country, such as issues with local governments and unemployment, which still lack concrete solutions.
The July politburo meeting is seen as conveying more dovish signals, indicating a clear stance on stabilizing economic growth and supporting the private sector. Despite this, the analysts, including Laura Wang and Fran Chen, believe that investor confidence remains fragile, and there is still a hesitancy to pre-position in a significant manner. This reluctance stems from previous disappointment with the relatively lackluster and lukewarm easing measures observed since March.
In addition, Morgan Stanley has downgraded Taiwan to “equal weight,” citing stretched valuations as technology stocks experience a surge.
The report acknowledges that it is challenging to pinpoint the exact top in a market fueled by AI-themed investments and retail investor activity. However, the analysts believe that a considerable amount has already been factored into the market’s current pricing, leading them to adopt a more cautious approach and move to the sidelines.