Investors from around the world flock to India for the first time, as Jonathan Garner from Morgan Stanley predicts India will outperform China for the fourth consecutive year

India’s Outperformance in Emerging Markets

According to Jonathan Garner, Chief Asia & Emerging Market Strategist & Chairman of Asset Allocation at Morgan Stanley, India is outperforming other emerging markets. Global investors are starting to move into the Indian market for the first time, following increased foreign direct investment and portfolio equity flows. India’s weight in the EM index is rising significantly, and many clients are chasing a moving target. Garner attributes India’s outperformance to superior GDP growth and earnings per share growth compared to other emerging markets.

Implications of US Interest Rate Cycle

Garner believes that the US 10-year yields have already peaked for this cycle and will start to fall. This disinflationary process globally will benefit India, which has a much-improved current account and fiscal position. As the US Federal Reserve cuts interest rates, Garner expects the Reserve Bank of India to follow suit with modest interest rate reductions. While monetary policy is important, Garner emphasizes that GDP growth and earnings growth are more crucial for India’s equity market.

Positioning of Global Investors

Global investors are starting to move into the Indian market, attracted by FDI and portfolio equity flows. Currently, they are broadly neutral compared to the rising benchmark weight within the specialist EM and Asia ex-Japan universe. However, Garner predicts that global equity funds will add exposure to India in the future, indicating a shift from neutral to overweight positioning.

Preference for India over China

Morgan Stanley strongly prefers India over China. Garner expects Chinese nominal GDP growth to be less than half that of India next year and anticipates disappointment in consensus expectations. He highlights that corporate return on equity in China has been falling relative to India and other emerging markets. Therefore, he recommends staying overweight on India as it is expected to outperform China for the fourth consecutive year in 2024.

Factors Affecting Indian Market in 2024

The Indian market’s performance in 2024 will be influenced by various factors such as elections and bond inclusion. However, Morgan Stanley has consistently been overweight on India and remains bullish on its outlook. Garner views India as part of a new era in Asian investing, along with Japan, driven by strong nominal GDP growth and a virtuous circle of corporate earnings, return on equity, and increased interest in the stock market.

Earnings Cycle and Valuation in India

Morgan Stanley believes that India is at the midway point of a long earnings cycle. The scale of foreign direct investment and private equity commitment in India is unprecedented, contributing to improved quality and sustainability of economic growth. In terms of valuation, Garner considers India’s high forward price-to-earnings ratio justified by the significant earnings per share growth observed over the past few years.