Morgan Stanley Report bullish on India; lists 10 BIG changes in last 10 years

Global financial powerhouse, Morgan Stanley has in its latest report hailed the Indian success story and mapped India's growth in the last 10 years. The Morgan Stanley report has defined how India has transformed itself in the last decade through its multiple policy reforms. The report states, "This India is different from what it was in 2013." The report highlights how India has gained position in the world order with 'significant positive  consequences' for the macro market outlook.

The report defends the 'top-performing' Indian stock markets over the past 25 years and highlights that the 'equity valuations are too rich' and maps 10 significant changes that have taken place in India in the last 10 years specifically because of policy changes since 2014.

India's 10 big changes in 10 years

1. Supply-side Policy Reforms
2. Formalisation of the Economy
3. Real Estate (Regulation and Development) Act
4. Digitalising Social Transfers
5. Insolvency and Bankruptcy Code
6. Flexible Inflation Targeting
7. Focus on FDI
8. India's 401(k) Moment
9. Government Support for Corporate Profits
10. MNC Sentiment at Multiyear High

The Indian economy has been steadily growing and the report projects positively for the future. Some of the areas in which the Morgan Stanley concludes India could draw strong success are manufacturing, export, consumption and a firm maintenance of inflation numbers.

Morgan Stanley lists 10 key implications according to their study of the Indian economy. Here are the key highlights:

1. Manufacturing and capex as percentage of GDP to increase steadily: "We expect a new cycle in manufacturing and capex, as we estimate the share of both to rise in GDP by approximately 5ppt by 2031," the report states.

2. Export market share to double: "We estimate that India's export market share will rise to 4.5 per cent by 2031, nearly 2x from 2021 levels, with broadbased gains across goods and services exports."

3. Major shift in consumption basket:
"As India's per capita income increases from US$2,200 currently to about US$5,200 by F2032, this will have major implications for change in the consumption basket, with an impetus to discretionary consumption."

4. Lower volatility in inflation and shallower interest rate cycles: "We expect inflation to remain benign and less volatile, which would imply shallower rate cycles. Shallower rate cycles could also imply more benign equity market cycles."

5. Benign trend in current account deficit: "We believe India's structural transformation will feed into the saving-investment dynamics, implying gains for its external balance sheet, with a progressively narrower trend in the CAD."

6. A profit boom: "The share of profits in GDP has doubled from all-time lows hit in 2020 and are set to rise further – maybe even double from here – leading to strong absolute and relative earnings. This explains India's apparently rich headline equity valuations. Triggered by supply-side reforms by the government, we expect a major rise in investments, a moderation in the CAD and an increase in credit to GDP to support the coming profit growth."

7. Lower correlation with oil prices: "Lower share of foreign portfolio (FPI) in current account funding has reduced the stock market's negative return correlation with oil prices, especially when oil prices rise due to supply disruption."

8. Lower correlation with US recession: As India's reliance on global capital market flows has reduced, the market's sensitivity to a US recession and US Fed rate changes also seems to be fading.

9. Valuation re-rating: This reflects persistent domestic demand for stocks and higher growth for longer. India is trading at a premium to long-term history, albeit well off highs and in line with recent history.

10. India's beta to EM has fallen to 0.6: This is a consequence of improved macro stability and reduction in dependence on global capital market flows to fund the CAD.

Some of the key risks enumerated by the report are as follows: A looming global recession, a fragmented general election outcome in 2024 and a sharp rise in commodity prices due to supply outages and shortages in skilled labor supply.