"Markets underestimating turn in growth cycle, says Morgan Stanley" - Business Standard, Sep 1, 2025
For years, many investors have watched India's stock market with a mix of hope and skepticism. While the nation's economic engine shows undeniable potential, the stock market's performance has often felt like a hesitant dance, lagging behind global peers. But now, a prominent voice from Morgan Stanley, led by strategist Ridham Desai, is shouting from the rooftops that something profoundly different is happening. They claim India's market is hitting a "rare combination" of factors that could finally unlock a sustained bull run, pushing stocks to unprecedented heights. This isn't just another optimistic forecast; it's a call for a fundamental re-rating of Indian equities, suggesting that the current valuations are simply too low given the improving economic landscape. But are we truly on the cusp of a new era for Indian stocks, or is this just another fleeting wave of enthusiasm?
The Long Shadow of Underperformance
It's crucial to understand the backdrop against which Morgan Stanley is making these bold pronouncements. For a significant period, India's stock market has been a picture of relative underperformance. While other emerging markets (EMs) have seen their valuations soar, India has largely trudged along.
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Year-to-Date (YTD) Performance (as of early September 2025, based on reports): The benchmark Nifty 50 has seen gains of less than 3%, a stark contrast to the broader EM index. (Business Standard, Sep 1, 2025)
Trailing Performance: Ridham Desai himself notes that India's trailing 12-month equity performance is the worst in the country's recorded history on a relative basis. (ScanX, Jan 7, 2026)
This extended period of lagging behind has likely led many investors to become cautious, questioning the market's ability to truly break out. The narrative has often been one of potential unrealized, of growth that never quite translates into market exuberance.
A "Rare Combination": The Pillars of Morgan Stanley's Thesis
What exactly is this "rare combination" that Morgan Stanley believes is setting the stage for a significant market upswing? Desai and his team point to a confluence of positive, albeit unusual, factors:
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Inexpensive Relative Valuations: Despite the potential, Indian stocks are seen as cheap when compared to their historical averages and global peers.
Poor Trailing Performance: This, paradoxically, is seen as a bullish signal, suggesting that the market has already priced in much of the negativity.
Strong Policy Stimulus & Growth Upside: Government policies and economic shifts are creating an environment conducive to robust growth.
Undervalued Currency: A weaker Rupee can make Indian assets more attractive to foreign investors and boost export competitiveness.
Weak Foreign Positioning: Foreign Portfolio Investors (FPIs) have significantly reduced their holdings over the past few years, indicating that they are under-invested and may need to buy back in.
Potential New Buyback Cycle: Companies might start repurchasing their own shares, a move that typically supports stock prices.
"Indian stocks, Desai argues in a strategy report, now offer an unusual mix of 'inexpensive relative valuations, poor trailing performance, strong policy stimulus and a consequent growth upcycle, an undervalued currency, weak foreign positioning and potentially a new buyback cycle.'" - NewsAirInsight, ~6 hours ago
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This cocktail of conditions is precisely what Ridham Desai believes is creating a "macro trade" that is about to unfold.
The Data Behind the Optimism: Earnings and Valuations
Morgan Stanley's analysis isn't just gut feeling; it's backed by proprietary indicators and projections.
Leading Earnings Indicator: This proprietary tool is signaling improving earnings growth. (NewsAirInsight)
Composite Valuation Indicator: Blending 11 metrics, this indicator suggests equity returns of around 16% in the next 12 months. (NewsAirInsight)
Sensex Earnings Projections:
Base Case: Compounding at 17% annually through FY28. (NewsAirInsight)
Broader Market EPS Growth: 22% in FY26, 20% in FY27, and 17% in FY28. (NewsAirInsight)
FY28 Target: In a bull case scenario, Morgan Stanley sees the Sensex reaching 1,00,000. (Business Today, Aug 4, 2025)
The core of Morgan Stanley's argument rests on the idea that markets are underestimating the turn in the growth cycle and the imminent earnings recovery. Current valuations, they contend, do not fully reflect these improving fundamentals.
Sectoral Shifts: Domestic Cyclicals to Lead the Charge?
Morgan Stanley's outlook isn't uniform across all sectors. They see a clear preference for domestic cyclicals over defensives and global cyclicals. Why?
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Rising Credit Growth & Low Credit Costs: Banks and financial institutions are likely to benefit from increased lending activity and manageable borrowing costs.
Recovery in Urban Consumption: As the economy strengthens, demand for goods and services in urban areas is expected to pick up.
Robust Government & Private Capex: Significant spending on infrastructure by both the government and private sector will drive growth in industrial and manufacturing sectors.
| Sector Preference | Rationale | Morgan Stanley Stance |
|---|---|---|
| Domestic Cyclicals | Rising credit, urban consumption recovery, strong capex | Overweight |
| Defensives | Less sensitive to economic cycles; expected to lag | Underweight |
| Global Cyclicals | Dependent on international demand; preference for domestic counterparts | Underweight |
| Industrials | Driven by government and private capex | Overweight |
| Materials | Preference for domestic over global | Underweight (300bp) |
| Energy | Preference for domestic over global | Underweight (200bp) |
| Healthcare | Avoiding defensive sectors | Underweight |
| Comm. Services, Cons. Staples, Technology | Equalweight (Neutral) |
(Source: Financial Express, Aug 7, 2025; CNBC TV18, Aug 5, 2025)
Morgan Stanley's sector calls are crucial signals for investors looking to position themselves for the anticipated upswing.
Past Echoes: Has This Combination Happened Before?
The idea of a market "re-rating" is significant. A re-rating implies a sustained increase in the price-to-earnings (P/E) multiple that investors are willing to pay for stocks, not just due to rising earnings but because of increased confidence in future growth.
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Morgan Stanley notes that valuation metrics comparing equity prices to short-term interest rates have "turned up" after several years. This suggests stocks are now relatively cheaper compared to cash and bonds than they have been in a long time.
"Stock market valuation turns favourable after 5 years, re-rating ahead: Morgan Stanley" - Economic Times, Jan 7, 2026
Historically, such shifts in valuation often precede strong market phases. The key question is whether the current environment is truly comparable to past periods that led to sustained bull markets, or if it's an anomaly.
The Unanswered Questions: Risks and Realities
While the outlook painted by Morgan Stanley is undeniably bullish, several critical questions remain:
Sustainability of Policy Stimulus: How long will government policy support and stimulus measures continue? Are they sustainable in the long run, or are they a short-term boost?
Global Economic Headwinds: Despite the focus on domestic factors, how will global economic slowdowns, geopolitical tensions, or rising commodity prices impact India?
FPI Inflows: While weak foreign positioning suggests room for buying, what will be the trigger for FPIs to significantly re-enter the Indian market in large volumes? Will it be a global risk-on sentiment, or specifically India's domestic narrative?
Inflationary Pressures: If the growth upcycle leads to increased demand, could this spark persistent inflation, forcing the Reserve Bank of India to reverse its supportive stance?
Execution Risk: India's ambitious capex plans and policy initiatives rely heavily on efficient execution. What are the potential bottlenecks and delays that could derail these plans?
Corporate Governance: In a re-rating scenario, will corporate governance standards keep pace with the growth, or will this become a point of concern for investors?
Currency Volatility: While an undervalued currency is seen as a positive now, could a sharp depreciation in the future lead to capital flight and imported inflation?
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The "rare combination" described by Morgan Stanley is compelling, but its longevity and the true extent of its impact depend on a delicate interplay of domestic policies and global economic forces.
The Road Ahead: A Re-rating or a Re-evaluation?
Morgan Stanley's prediction of a market re-rating, with targets like Sensex at 95,000 (ScanX, Jan 7, 2026) and even 1,00,000 in a bull case (Business Today, Aug 4, 2025), signals a fundamental shift in their view. They are not just expecting earnings growth to drive prices higher, but for the market's perception of Indian equities to change permanently.
The convergence of cheap valuations, poor past performance, supportive policies, and an underweight foreign investor base presents a unique window of opportunity. However, as any critical observer knows, market cycles are rarely linear. The next few years will be crucial in determining whether this predicted "perfect storm" leads to sustained new highs or a more modest, albeit positive, recovery. Investors must remain vigilant, weighing the optimistic projections against the inherent risks and complexities of the global and domestic economic landscape.
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Sources:
Economic Times: https://economictimes.indiatimes.com/markets/stocks/news/indian-stocks-enjoy-a-rare-combination-makes-a-case-for-re-rating-morgan-stanleys-ridham-desai/articleshow/127972117.cms (Published: 47 minutes ago)
News Air Insight: https://newsairinsight.com/indian-stocks-enjoy-a-rare-combination-makes-a-case-for-re-rating-morgan-stanleys-ridham-desai-news-air-insight/ (Published: 6 hours ago)
Business Standard: https://www.business-standard.com/markets/news/morgan-stanley-india-growth-cycle-re-rating-earnings-recovery-1250901003731.html (Published: Sep 1, 2025)
Times Now News: https://www.timesnownews.com/business-economy/markets/indias-stock-market-comeback-morgan-stanley-sees-a-bull-run-in-the-making-heres-what-it-means-article-153170945 (Published: Nov 18, 2025)
ScanX: https://scanx.trade/stock-market-news/stocks/morgan-stanley-s-ridham-desai-sees-bullish-turn-for-indian-equities-bets-big-on-domestic-recovery/29316693 (Published: Jan 7, 2026)
Business Today: https://www.businesstoday.in/markets/stocks/story/stock-market-morgan-stanley-sees-strong-case-for-re-rating-new-highs-soon-487690-2025-08-04 (Published: Aug 4, 2025)
Economic Times: https://economictimes.indiatimes.com/markets/stocks/news/stock-market-valuation-turns-favourable-after-5-years-re-rating-ahead-morgan-stanley/articleshow/126389557.cms (Published: Jan 7, 2026)
The Financial Express: https://www.financialexpress.com/market/india-set-for-new-highs-morgan-stanleys-top-10-picks-to-ride-the-rally-as-ridhan-desai-predicts-re-rating-3936963/ (Published: Aug 7, 2025)
CNBC TV18: https://www.cnbctv18.com/market/ridham-desai-morgan-stanley-indian-markets-sensex-nifty-new-high-key-catalysts-risks-valuations-target-19648613.htm (Published: Aug 5, 2025)
