The investment case for India is hard to argue with, according to analysts at Morgan Stanley — but they warn that upcoming elections with “potential binary outcomes sets the market up for volatility.” In a Nov. 12 research note called “A Year of Volatility,” the investment bank’s analysts led by Ridham Desai wrote that their base case expectation is that Indian equities will rise in the lead-up to the 2024 general elections, “as the market is likely to price in continuity and a majority government.” India goes to the polls between April and May next year. Its last election in 2019 saw Prime Minister Narendra Modi win a second term by a landslide . In its base case, Morgan Stanley sees the BSE Sensex index — which captures 30 well-established stocks on the Bombay Stock Exchange — hitting 74,000 by December 2024, giving it an upside potential of around 12% from current levels. “We assume continuity in a government with a majority mandate, robust domestic growth, the U.S. does not slip into a protracted recession and benign oil prices,” the bank said of its base case scenario. “Government policy remains supportive, and the RBI (Reserve Bank of India) executes a calibrated exit from its current hold stance. Sensex earnings compound 21.5% annually through F2026E.” The fundamentals for this are underpinned by “strong macro stability as a result of improving terms of trade, flexible inflation targeting and stable non-portfolio foreign flows,” the bank said. India’s economy has certainly proved resilient this year, with GDP growth coming in at 7.8% in the June quarter . Last month, the International Monetary Fund hiked its growth forecast for India to 6.3% for both this year and next. For Morgan Stanley, the downside, or bear case, to its forecast would see India’s elections result in a change in government. “India’s elections deliver an unclear mandate with a change in government, oil prices surge past US$110/barrel, the RBI ends up tightening to protect macro stability and a US recession leads global growth lower,” the bank said of its bear case scenario. “Sensex earnings compound 15.5% annually over F2023-25E with meaningfully slower growth in F2025 and equity multiples de-rate to reflect poor macro conditions.” Focus list of overweight-rated stocks Looking ahead to India in 2024, Morgan Stanley is overweight on companies in the financials, consumer discretionary, industrials and technology sectors. Its “focus list” of overweight-rated stocks includes automaker Maruti Suzuki , aerospace and defense systems operator Hindustan Aeronautics as well as technology consulting giant Infosys . From the financial services sector, Morgan Stanley is overweight on ICICI Bank and insurer SBI Life Insurance . — CNBC’s Michael Bloom contributed to this report.
