New Delhi [India], January 7 : India's stock market returns are likely to improve in the coming months as several key fundamentals turn favourable, according to a Morgan Stanley report.
The report noted that the past 12 months have delivered the weakest market performance on record, while valuations are nearing earlier lows. For the first time in almost five years, equity valuations are more attractive than short-term interest rates.
The report noted that valuations, past performance, macroeconomic conditions, investor positioning, and the growth cycle all point to better stock returns ahead. Its modified earnings yield gap also suggests improved risk-reward conditions for equity investors.
It stated "Valuations, trailing performance, the macro, positioning and the growth cycle all signal improving stock returns in the months ahead".
The report highlighted a clear pickup in growth momentum, with earnings growth expected to rise sharply as India's growth cycle accelerates. This is likely to be supported by policy measures from the Reserve Bank of India and the government, including interest rate cuts, a CRR cut, banking reforms and liquidity support.
Additional demand support is expected from front-loaded capital spending and nearly Rs 1.5 trillion in GST rate cuts, which will mainly benefit mass consumption. Improving ties with China and China's policy efforts are also seen as positive, signalling a reversal of India's post-COVID hawkish macro stance.
On the macro front, the report said conditions strongly favour equities. The yield curve is steepening, money supply dynamics are improving, nominal growth is outpacing interest rates and the rupee appears undervalued, a combination that has historically supported strong equity returns.
Investor positioning is another positive factor. Foreign portfolio investor exposure has weakened over the past four years, raising the possibility of a "pain trade" that could drive markets higher.
Morgan Stanley also sees scope for a market re-rating, citing lower oil dependence, a higher share of exports, especially services, and continued fiscal consolidation. These factors, along with lower inflation volatility, are expected to result in structurally lower real interest rates and reduced economic volatility in the years ahead.