From a forward perspective, valuations appear less tense
Addressing concerns that Indian growth is already priced in, Garner noted that valuation premiums have fallen sharply. Based on a two-year target of 95,000 for the Sensex, Indian shares trade at around 18 times forward earnings, compared with roughly 13 times for emerging markets overall. “At its peak, India was trading at almost twice the valuations of emerging markets. That gap has narrowed significantly,” he said.
Despite continued outflows from foreign institutional investors (FII), Garner pointed out that specific emerging market funds are now slightly underweight in India – the most negative positioning in almost a decade. “That essentially creates the possibility of flows reversing as the earnings cycle turns,” he said.
Policy easing and revival of capital investment are key to earnings recovery
Garner attributed the expected earnings rise to several domestic factors, including monetary easing by the Reserve Bank of India, improving regulation and early signs of an uptick in the capital spending cycle. He acknowledged that nominal GDP growth – key to boosting revenues and profits – has been weak, even as real GDP growth remains strong.
“Inflation remains below 2%, which is extremely low. That has dampened nominal GDP growth, but also creates room for policy support,” he said.
The budget, fiscal position and currency remain supportive
On fiscal risks ahead of the Union Budget, Garner said India is likely to pursue modest fiscal consolidation, targeting a deficit of around 4.2% of GDP. He described India’s macro position as “very strong”, citing a stable current account, healthy foreign exchange reserves and currency trading below the real effective exchange rate trend. “These factors make India an interesting and relatively resilient story in a highly uncertain global environment,” he said.
Sector preferences: financial services, industry, consumption
Within Indian equities, Morgan Stanley remains overweight in financials, industrials and consumer discretionary. Garner said India’s young and urbanizing population continues to support modern consumption patterns, making the country “somewhat unique among major global economies.”
However, he expressed caution about IT services stocks, citing uncertainty over how artificial intelligence adoption could impact traditional revenue models. “IT services is not a sector we are particularly excited about at the moment,” he says.
Within the financial sector, Morgan Stanley prefers private sector banks and non-banking financial companies over PSU banks, highlighting the potential of AI-led cost efficiencies to drive profitability. The company’s focus list includes ICICI Bank and Bajaj Finance.
Global context: China, tariffs and commodities
Comparing India to China, Garner says China’s nominal GDP growth remains weak and lacks clear catalysts for a broad-based cyclical recovery, despite selective opportunities in areas such as AI. On US trade policy, he noted that Asia has largely settled into a tariff equilibrium with the US, and Indian manufacturing exports to the US still constitute a small share of GDP.
On commodities, Garner said Morgan Stanley remains constructive on gold, driven by rising demand for real assets among pension funds and retail investors amid high global debt and budget deficits.
Outlook: India is among the favorite emerging markets
While Morgan Stanley has reduced risk exposure after four years of outperformance in the Indian market, Garner says India remains one of the firm’s favorite markets in the coming year, alongside Brazil, the UAE and Singapore.
“The key question is whether this cyclical downturn in India – which has surprised us in its intensity – is now waning and improving. If so, India should once again stand out within the Asia and emerging markets universe,” he said.
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