Key insights
- Morgan Stanley forecasts a strong year for Indian equities, anticipating an earnings growth acceleration driven by rising capital expenditure in key sectors like semiconductors and defense. Despite near-term risks from Middle East conflict and drought, supportive policies and attractive valuations suggest significant upside. The firm recommends overweighting financials and industrials, viewing India's contribution to global growth as a key bullish driver.
Investing.com -- Morgan Stanley believes Indian equities have reached a bottom and are positioned for significant gains in the year ahead, citing an expected acceleration in earnings growth alongside improving valuations and sentiment.
The investment bank said Indian earnings appear to be entering a new upcycle. The firm noted that near-term risks include potential prolonged conflict in the Middle East and severe drought conditions during the upcoming summer sowing season.
Morgan Stanley expects the earnings growth acceleration to continue for several quarters beyond these immediate challenges. The firm anticipates investment as a percentage of GDP will rise to 37.5% over the next five years, driven by capital spending across energy, defense, semiconductors, fertilizers and data centers.
The policy environment remains supportive with an undervalued currency, modest real interest rates and fiscal stability, according to the bank. Morgan Stanley highlighted that India's share of global profits now exceeds its global index weight by the largest margin on record, excluding 2009.
For equity investors, the firm pointed to broad-based growth acceleration, strong domestic equity flows, an emerging initial public offering pipeline, the worst trailing 12-month relative performance on record, relative valuations at previous lows and multi-year low foreign positioning.
India accounted for 18% of global GDP growth in 2025, a figure Morgan Stanley expects to increase in coming years. The bank said if India can achieve 12% nominal growth, the equity market could deliver strong returns through the end of the decade.
Morgan Stanley recommends overweighting financials, consumer discretionary and industrials, while underweighting energy, materials, utilities and healthcare. The firm favors domestic cyclical sectors over defensive and external-facing sectors.
The bank identified information technology services as a potential outperformer as companies globally turn to these firms to develop artificial intelligence applications and solutions.
Key risks to the outlook include geopolitical tensions, slowing global growth, low agricultural productivity, judicial capacity constraints and potential labor market disruption from AI adoption.