Indian stocks look attractive, valuations cheapest since Covid: Morgan Stanley

Amid an ongoing sell-off on Dalal Street due to concerns about growth outlook and trade wars, global brokerage firm Morgan Stanley has stated that Indian stocks are now looking attractive, with a stock pickers' market unfolding.

"A likely positive shift in fundamentals is not yet priced in – we expect India to recover lost ground against its peer group through the rest of 2025," Morgan Stanley India equity strategist Ridham Desai said in a note.

Arguing that valuations are the most attractive since the COVID-19 pandemic, he mentioned that their sentiment indicator is in strong buy territory.


"We remain ahead of the consensus on earnings. Crucially, India's relative earnings growth is turning positive, even based on the more conservative consensus forecasts," Desai said, adding that India's low beta characteristic makes it an ideal market for the uncertain macro environment that equities are facing.

Investors remain skeptical, as the market has ignored the RBI's policy pivot and a strong budget from the government, among other positive developments since early February.

"India's fundamentals appear to be improving after a soft patch, while share prices are materially lower. Save for negative global developments, this could be a turning point for stocks for the rest of 2025," Morgan Stanley said.

The bullish report comes after the Nifty has fallen around 15% from its September peak, declining non-stop for five consecutive months – the first time in history.
The brokerage said it prefers cyclicals over defensives and small and midcap stocks over largecaps.

"Overweight financials, consumer discretionary, industrials, and technology, and underweight other sectors. This is likely to be a stock pickers' market, in contrast to one driven by top-down or macro factors since the COVID-19 pandemic," it said.

While investors remain very skeptical about India’s growth narrative amid the recent slowdown, Morgan Stanley analysts say India is still the best positioned in the region against the backdrop of low goods exports, strong services exports, and policy support for domestic demand.

"While we acknowledge the potential downside risks from trade tensions, we are confident that a recovery in domestic demand is taking shape and will help drive growth momentum, allowing India to take back its driving seat in the region’s growth," Morgan Stanley economists Chetan Ahya and others said in a note.

In the event of a sharper slowdown in global trade, India will also be a relative outperformer, considering its goods exports to GDP are the lowest in the region and its services exports tend to be more defensive with an offset from continued gains in market share, they said.

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Morgan Stanley said recovery will continue to firm over the coming months as green shoots are already emerging in recent data.

"We believe the recovery will be driven by sustained momentum in government capex spending, triple easing on monetary policy, moderation in food inflation lifting real household incomes, and improvement in services exports," the brokerage said.