Stock market correction: Why Morgan Stanley sees recovery ahead

Morgan Stanley on Tuesday said the Indian stock market appears poised for a recovery from the steep relative correction since late September 2024, supported by a turning growth cycle. The market is transitioning into one that will be driven by macros and stock picking will lose importance, Morgan Stanley said adding: "We are capitalisation-agnostic." 

The foreign brokerage said key factors driving India's equity underperformance are reversing. 

It noted that the growth slowdown that started the second half of 2024, coupled with rich relative valuations, appeared to be the fundamental drivers weighing down on domestic stocks.  That India does not offer explicit Al-related trades is another reason, it said.

"The delay in the US trade deal has also contributed to volatility, and India's low beta does not help in a global equity bull market," Morgan Stanley said.

Morgan Stanley said a positive growth surprise is likely in the months ahead.  "India's growth cycle is set to accelerate, backed by the reflation effort of the RBI and the government via rate cuts, CRR cut, bank deregulation and liquidity infusion, front loading of capex and a near Rs 15 trillion in GST rate cuts (with a skew to mass consumption)," it said.

The thawing of relations with China and the China's anti-involution add to the mix. A likely India- US trade deal should further boost investor sentiment, it said.

Morgan Stanley said it is ahead of the consensus and expects positive earnings revisions. It sees a rate cut in the ongoing quarter and also policy reforms. 

"While GST rate cuts was the big one, several measures including privatisation are likely underway. India US trade deal and a lowering of US tariff on India would all be positives. 

Morgan Stanley said FPI positioning remains near lows, but net FPI buying will need growth to recover and/or bull markets elsewhere to fade. 

Morgan Stanley said it prefers domestic cyclicals to defensive and external-facing sectors. It is overweight on financials, consumer discretionary, and industrials. The foreign brokerage is underweight on energy, materials, utilities and healthcare.