Despite the market’s worst 12-month relative performance compared to emerging-market peers on record, Morgan Stanley has maintained a strong multi-year forecast for Indian equities.
According to a strategy note by analysts Ridham Desai and Nayant Parekh, the fundamentals of the home market are still strong, which means that investors could see significant compounding returns for the rest of this decade. Improving corporate earnings, increasing investment activity, and supporting macroeconomic conditions are key pillars that have been identified.
At a time when global money is increasingly gravitating into AI infrastructure, semiconductors, and technology-heavy markets, the broking has recognised the lack of a direct AI-linked market theme as a major obstacle for Indian stocks. The experts noted that the absence of an AI play remains a significant obstacle for the equity market.
There is a strong correlation between international investment in technology and India’s IT outsourcing sector, which Morgan Stanley has warned might be disrupted by AI. Concurrently, the paper stated that, due to its comparatively low labour productivity base, India stands to gain significantly from AI-driven productivity advances. Additional research suggests that Indian IT services providers may emerge as “the dark horse” when multinational corporations seek their expertise in artificial intelligence (AI) development.
Despite the relative underperformance of late, there are a few encouraging signs that are starting to emerge. The broking has brought attention to the fact that 12-month rolling corporate buybacks are getting close to record highs and can soon surpass $10 billion on a trailing basis. This is a factor that can support valuations and provide a foundation for shareholder returns.
Additionally, valuations have grown more realistic, as pointed out by Morgan Stanley. The current price-to-book multiple for MSCI India is 3.4 times, which the company claims has traditionally been associated with expected yearly returns of about 11% over the next 10 years.
Even while there may be some short-term volatility due to global AI momentum and capital flows, the analysis indicates that the structural case for Indian equities is still strong. In the years to come, the market will likely be propelled by policymakers’ emphasis on investment, a steady trajectory of corporate profitability, and active policies regarding the return of capital.
The note suggests that investors should consider the possibilities presented by repurchases, improved fundamentals, and the changing role of Indian IT services in the global AI ecosystem in relation to the near-term problem of limited direct AI exposure.
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