Morgan Stanley upgraded Indian stocks to “overweight” from “equal weight,” citing a strong profit outlook and the country’s attractiveness to investors in a “multipolar world.” India’s situation is in “stark contrast to that in China,” the bank said in its Aug. 2 note. “With GDP per capita only US$2.5k per capita (vs. US$12.7k 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. It added that India’s household debt is at 19% of its gross domestic product, lower than China’s 48%. Morgan Stanley downgraded Chinese stocks to equal weight in the same note. India’s manufacturing and services purchasing managers’ indexes have “rallied consistently” since Covid-19 restrictions ended, in contrast to the “rapid fade” seen in China, said the bank. Morgan Stanley also said India’s ability to “leverage multipolar world dynamics” is a significant advantage: it’s a member of the Quad; it’s benefiting from a surge in foreign direct investment; and private equity firms are expanding there. “Simply put, India’s future looks to a significant extent like China’s past,” the bank said, adding it expects GDP growth in India to be around 6.5% at the end of the decade, above China’s 3.9%. Stock picks While Indian stock valuations “overshot somewhat” last October, it’s “less extreme” now, Morgan Stanley said. The industrials, financials and consumer discretionary sectors will be major beneficiaries of India’s “structural story,” it said, giving all three an overweight rating. “Improvement in per-capita income boosting consumption and a broadening credit penetration should help the Financials sector. Strong government capex and a pickup in private capex will drive up demand for industrial companies,” the bank wrote. Morgan Stanley added two Indian stocks to its focus list: Maruti Suzuki : Morgan Stanley said the automaker is set to benefit from a higher per-capita income in India; an expansion in market share; and an improving product mix. Valuations remain fair, it added. It gave Maruti Suzuki nearly 15% potential upside to its target price, based on its Aug. 1 closing price. Larsen & Toubro : The bank said the construction firm is a beneficiary of the country’s capital expenditure cycle. “Beside domestic macro tailwinds, infrastructure prospects from the Middle East, particularly Saudi Arabia, remain strong,” it added. It gave Larsen & Toubro nearly 7% potential upside to its target price, based on its Aug. 1 closing price. The other Indian stocks on its focus list are ICICI Bank and Hindustan Aeronautics , which it gave a potential 35.7% upside and 10% downside respectively. — CNBC’s Michael Bloom contributed to this report.
