The Global investment bank Morgan Stanley has recently upgraded its outlook on India to ‘overweight’ from an ‘equal weight’ rating, citing the country’s relative valuation to emerging markets (EMs). At the same time the bank hasn’t given any target for the index, and has said that certain key domestic and international events should help in further boosting the market sentiments.
The Morgan and Stanley report says that India is becoming a low-beta market within the emerging market basket. India’s relative valuations and positioning amongst the fund managers have come off from its record highs. Also, the bank sees lesser rich valuations and less crowded positioning for India. Attractive dividend yields on the back of rising dividends per share are another reason for the rating upgrade.
HSBC Global Research in a report had upgraded the Indian equity market to neutral from underweight and also raised its 2016 Sensex target to 26,000.
According to authors of the report, Devendra Joshi and Herald van der Linde, “India's valuation premium to Asia has declined and is now approaching a 10-year average premium. The hype which led to euphoric rally is almost gone now”.
However various analysts claim several reasons of this upgrade:
• India no more pricey, less crowded now: Global emerging market (GEM) fund managers are turning less overweight in India, with their overweight position coming off to only 5.4 per cent from a record high 7.9 per cent in 1Q2015. The domestic flows proved resilient through a difficult Q1.
• Earnings recovery: Morgan Stanley's India strategist Ridham Desai believes Indian companies' Earnings disappointment so far is mainly due to a combination of sluggish global growth, tight fiscal policy, and PPI deflation, but India earnings will turn later this year resulting in 3 per cent earnings growth in FY2016 before accelerating to 14 per cent YoY growth in FY2017.
• Attractive dividend yields: MSCI India's dividend per share is on a consistent rising path post global financial crisis, and its dividend yield relative to EM is now reaching a historically high level.
• Supportive macros & RBI easing: India's macro climate is well placed with little deflation threat, favourable demographics; low overall debt, and possibility of productivity-enhancing reforms, said the MS note. Further, monetary easing will also aid recovery
• India now a low-beta market: India's beta to MSCIEM has significantly reduced, ever since the national government changes in 2014 to only 0.80 times currently. The analysts also see a sign of de-coupling between Morgan Stanley Capital International (MSCI) India performances versus the rest of EM, evidenced by the decreasing correlation.
Over the last two years, in the period marked by Narendra Modi becoming India’s Prime Minister, the country has reportedly become more competitive and prosperous and such new surveys truly demonstrates that India’s place in the world is edging higher.