Morgan Stanley upgrades India shares to 'overweight', downgrades China to 'equal weight'

Morgan Stanley has upgraded India rating to 'overweight' --four months after it assigned an 'equal weight' to the domestic stock market, as it felt the country is at the start of a long wave boom.  A team of Asia strategists raised the India equity rating saying relative valuations are “less extreme” than in October and the nation’s reform and macro-stability agenda supports a strong capex and profit outlook. The foreign brokerage said it see a secular trend towards a sustained superior dollar EPS growth for India versus emerging  markets over the cycle, with a young demographic profile supporting equity inflows.

The move on India came at a time when Morgan Stanley cut its rating on Chinese stocks to equal weight, saying investors should capitalise on a rally spurred by government stimulus pledges to take profits. The foreign brokerage said it has downgrade MSCI China to equal weight as growth and valuation concerns remain.

India's situation is in stark contrast to that in China, "as borne out by our recent visit in June to the MS annual investment summit in Mumbai," it said.  With GDP per capita only $2,500 per capita against $12,700 for China and positive demographic trends, India is arguably at the start of a long wave boom at the same time as China may be ending one, it said.

Consider that household debt-to-GDP in India is just 19 per cent against 48 per cent for China and that only 2 per cent of Indian households have life insurance, Morgan Stanley said. "India rises from #6 to #1 in our process, with relative valuations less extreme than in October, while MS macro, strategist and bottom-up analyst scores reflect MS' Blue Paper thesis on India's Decade. Multipolar World trends are supporting FDI and portfolio flows, with India adding a reform and macro-stability agenda that underpins a strong capex and profit outlook," Morgan Stanley said.

"MSCI China is now within 7 per cent of our target of 70 and has delivered 9 per cent total returns since December 4, in line with MSCI EM. The market moves down to #13 in our framework, given still-negative earnings revisions and weak ROE and profit margins vs. history, which undercut cheap valuations. The July Politburo meeting signalled policy easing, but key issues including LGFV debt, the property and labour markets and the geopolitical situation need to improve significantly, in our view,," it said.

India has now become the core overweight market for Morgan Stanley within the Asia Pacific Ex-Japan and Emerging Markets basket. India's valuation premiums to emerging markets and China have moderated significantly from last October's high and are starting to rise again.

Morgan Stanley, meanwhile,  maintained its overweight rating on Korea, citing more valuation support and “non-tech drivers” relative to Taiwan. It reduced Australia equities rating to underweight, citing earnings/valuations risks.

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