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    Morgan Stanley downgrades India to equal-weight

    Synopsis

    Morgan Stanley said it expects a structural multi-year earnings recovery in India, but at 24 times forward price to earnings it will look for some consolidation ahead of US Federal Reserve's tapering, an RBI hike in February and higher energy costs.

    IndiaAgencies
    Morgan Stanley in a recent note had said that early signs of capital expenditure, supportive government policy for higher corporate profit share in GDP and a robust global growth outlook will help India enter a new profit cycle, which may result in earnings compounding at over 20% per annum for the next three to four years.
    Morgan Stanley has downgraded India and Brazil equities to equal-weight while upgrading the Indonesian market to overweight position.

    Morgan Stanley said it expects a structural multi-year earnings recovery in India, but at 24 times forward price to earnings it will look for some consolidation ahead of US Federal Reserve's tapering, an RBI hike in February and higher energy costs.

    "We move tactically equalweight on India equities after strong relative gains - we expect a structural multi-year earnings recovery, but at 24 times forward price to earnings, we look for some consolidation ahead of Fed tapering, an RBI (rate) hike in February and higher energy costs," said Morgan Stanley.

    MSCI India has gained 26% in the last 6 months, outpacing the MSCI Emerging Markets index by 30% over the same period. Morgan Stanley said this strong outperformance is partly due to bullish consensus earnings expectations and a favourable reform agenda.

    Morgan Stanley in a recent note had said that early signs of capital expenditure, supportive government policy for higher corporate profit share in GDP and a robust global growth outlook will help India enter a new profit cycle, which may result in earnings compounding at over 20% per annum for the next three to four years.

    However, the financial services firm said that valuations are increasingly constraining returns over the next three to six months.

    "Notwithstanding the already-sharply upgraded consensus earnings through 2021, India's 12-month forward P/E ratio has moved to an all-time high of 24.1 times. As a result, India is the most expensive market in our model on EM-relative 5-year trailing z-score of P/B and P/E," said Morgan Stanley. Indices may take a breather from here and look for some consolidation, said Morgan Stanley, adding that it prefers consumer discretionary and financials while avoiding the technology and healthcare sectors.


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