Domestic cyclicals take front seat for Morgan Stanley

New Delhi: Morgan Stanley believes investors may be underestimating a pivotal shift in India’s growth cycle, with both earnings and market peaks still ahead. Reflecting this conviction, the global brokerage firm has realigned its portfolio strategy to favour domestic cyclicals over defensives and export-led sectors.

Under its ‘Gunning for Growth’ theme, Morgan Stanley has turned overweight on financials, consumer discretionary, and industrials, while adopting an underweight stance on energy, materials, utilities, and healthcare.

The international brokerage company emphasised that headwinds from the global slowdown and rich valuations in the second half of 2024 are now reversing, setting the stage for India to deliver stronger relative performance.

Structural tailwinds — such as improved macro stability, declining oil intensity in GDP, a growing share of services exports, fiscal consolidation, and lower inflation volatility — support the case for higher P/E multiples and structurally lower real interest rates.

Morgan Stanley highlighted that a favourable mix of high growth, low volatility, falling interest rates, and low beta could drive a significant market re-rating.

“The shift is also being reinforced by a growth-oriented macro policy, with recent rate and CRR cuts, front-loaded government capital expenditure, and sweeping GST rate reductions aimed at spurring mass consumption,” the global firm said.

The brokerage has expectations of positive earnings revisions, another RBI rate cut within the current quarter, and additional policy reforms to act as catalysts. A potential India-US trade deal, lowering tariffs, can also be seen as an upside trigger.