India most preferred emerging market pick: Morgan Stanley

Morgan Stanley has increased the overweight stance on India as the most-preferred emerging market (EM). Relative economic/earnings growth is improving, and the macro-stability setup looks sufficient to withstand the higher real rate environment. The “dream” run of domestic flows continues and multipolar world dynamics are driving both FDI and portfolio flows toward India, Morgan Stanely said.
Recent high-frequency trends also support the bullish stance with inflation concerns abating and the trade balance improving. The report highlighted risks for Asia/EM equities given rising real rates, geopolitical uncertainty and narrowing market leadership. We reduce beta, downgrading Korea and UAE to EW, while upgrading Singapore and Poland to OW and Malaysia to EW. India and Japan remain top picks, Morgan Stanley said.
MSCI EM equities have fallen to 10 per cent since July 28, retracing half of their gains from October 2022. We see the market at a crucial juncture given still negative earnings revisions (exacerbated by USD strength) and a challenge to valuations from rising geopolitical risks and 10-year US real yields (re-testing their post-2007 highs of 2.5 per cent) for a volatility-based framework exploring risks for the asset class.
“We remain structurally bullish on India with the key thesis of our market upgrade intact. Our India Economics Team’s recent tracker shows projects under implementation have recorded broad-based growth and PMI manufacturing has remained in the expansionary zone since July 2021, likely driven by strong domestic demand amid broad external weakness.