Morgan Stanley analysts say Indian stocks look set for a significant recovery over the coming months, based on a combination of recent market performance, valuation levels, investor positioning and a rebound in corporate earnings.
The bank notes that India recorded one of its weakest 12-month performances on record, while relative valuations have fallen back to trough levels seen in prior downturns. According to the report, India’s share of corporate profits outpaces its index weight by the largest margin on record. The Sensex is trading close to its cheapest level ever when valued against gold, the analysts added.
Investor positioning has softened in recent months, with foreign portfolio investors reducing exposure. High-frequency indicators show the earnings cycle has resumed broadly, although the report points to a March dip that it attributes to conflict-related weakness.
On policy and currency, Morgan Stanley highlights a shift in sentiment from the Reserve Bank of India regarding the rupee. The bank describes the currency as remaining undervalued. It also states that policy momentum looks strong and that domestic demand has held up even after a major market drawdown.
The analysts identify several supply-side challenges linked to the Middle East conflict, notably disruptions in gas and fertilizer markets. They expect India to take measures to address these issues, a response the bank regards as positive for the medium-term economic outlook. Morgan Stanley also sees room for rising defense spending over coming years and anticipates that India’s energy transition could accelerate.
At the same time, the report flags a persistent challenge: the lack of direct exposure to artificial intelligence in India’s market composition. It notes that potential AI-driven disruption to services exports creates an additional area of concern.
In terms of portfolio positioning, Morgan Stanley’s strategy favors domestic cyclicals over defensive and externally oriented sectors. The bank recommends overweight allocations to financials, consumer discretionary and industrials, while taking underweight positions in energy, materials, utilities and healthcare.
Overall, the firm presents a constructive outlook for Indian equities supported by valuation, positioning and earnings dynamics, while also highlighting supply-side pressures and structural exposure risks that investors should monitor.