Garner highlighted the contrast with the United States, where the Federal Reserve has been unable to cut rates due to persistent inflation concerns.
India’s macro environment makes it Morgan Stanley’s largest overweight. The country’s economy grew by 7.4% in the latest quarter, making it the fastest among its global peers.Garner pointed to multiple factors supporting the case for Indian equities: steady bond yields, a stable currency, and strong participation from both domestic and foreign investors. “It is a very attractive feature of an equity market if locals are committing regular pools of savings,” he said, referring to the ongoing strength in domestic SIP (Systematic Investment Plan) inflows.
India’s 10-year bond yields have also edged lower—unlike in several other regions—contributing to what Garner described as a “virtuous circle” of growth, savings, and investment.
On the earnings front, Indian companies continue to deliver. “Earnings for MSCI India have been compounding at about 12% per year in US dollar terms for the last five years,” he said. “That is the strongest dollar earnings per share growth of any major market.”
Valuations, however, remain elevated. MSCI India is currently trading at about 22 times forward earnings, similar to the S&P 500. But Garner believes the premium is warranted. “Earnings growth here is faster than the S&P… It’s a growth market, and so it should be on a growth multiple.”He also expects a shift in global capital flows as the dollar weakens. Morgan Stanley sees the DXY Index falling to around 90, implying a 9-10% drop from current levels. “US growth is going to fall. We think next year will be about 0.5%,” he said, explaining that narrowing growth differentials are likely to drive more flows into non-US markets, including India.
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Morgan Stanley favours Indian financials, industrials, and consumer discretionary sectors. Financials are seen as key beneficiaries of domestic growth. “They can probably grow earnings somewhat faster than overall nominal GDP growth,” he said. The firm is more cautious on defensive sectors and companies with revenue exposure to global trade, due to the weakening dollar.
Garner noted recent upgrades in cement and capital expenditure-related stocks by Morgan Stanley analysts. While expressing interest in consumer discretionary, he said they are still watching the emergence of strong local brands. “We are waiting to see around truly significant local brands,” he said.
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