InvestorQ : Why has Morgan Stanley downgraded India to Underweight when the whole world thinks that the Indian markets have the highest potential?
Aashna Tripathi made post

Why has Morgan Stanley downgraded India to Underweight when the whole world thinks that the Indian markets have the highest potential?

Aditi Sharma answered.
2 months ago

Hard to say but that is a fact that Morgan Stanley has downgraded India to underweight. Here are some important points that you must know about this downgrade.

· The concern for Morgan Stanley is not just about the valuations and growth. They are also worried because Indian markets have held up well in tough conditions.

· You can call this follies of mean reversion, but that is what it is. There is a tendency among brokers to very strongly believe in the theory of mean reversion. They do seriously believe that, if something is too good to be true then it is probably not true.

· That is why, Morgan Stanley has downgraded India to “underweight”. The reason offered is that India has outperformed its EM peers by a huge margin, which makes it relatively expensive. Morgan Stanley is overweight on South Korea and Taiwan.

· Morgan Stanley is rather surprised that despite global mayhem and headwinds of rates, inflation and recession; Indian markets have been largely unperturbed if not nonchalant. In contrast, other emerging markets have taken a sharp knock.

· Look at the numbers. MSCI Emerging Markets index is down -40%, and this is much sharper than the average fall in the last 10 previous bear markets. However, India has been holding on positive which makes it a relative problem.

· Take the period since the start of the year 2022. The benchmark indices of Japan, China, Hong Kong, Taiwan and South Korea have fallen sharply by 5% to 25% on an average during this year. At the same time, Nifty is down by just 0.1% in this same period.

· That is the main reason why Morgan Stanley is underweight on India, while it has turned overweight on Taiwan and South Korea. What is more interesting is that Morgan Stanley has also upgraded China to Equal Weight.

· Now China is a market where even the likes of Apple are becoming sceptical and is looking to hedge its China risks by shifting part of the production to India. The correction from the peak levels has wiped out $5.2 trillion in Chinese market cap.

· Is it logical to say that Indian markets could be an underperformer purely based on its relative performance is a good idea. There are some differences to note here. Unlike most South East Asian nations, India is not such an export dependent economy. Most of India’s growth is driven by domestic drivers.

· Unlike the Koreas and Taiwan of the world, India has a huge domestic market. what is surprising is that Morgan Stanley is very bullish about the financial services sector in India, which is the very epitome of the domestic growth story. It is hard to see how the market can be an underperformer when 32% of the index is doing well.

· Morgan Stanley is also very positive on the semiconductor industry in South Korea and Taiwan, which is not too surprising, considering the tremendous shortages that this sector faces.