Morgan Stanley analysts highlight several factors to support their views. They note that household debt/GDP in India is only 19% compared to China’s 48%, and a mere 2% of Indian households have life insurance. Additionally, manufacturing and services PMIs in India have consistently rallied since the lifting of Covid restrictions, in contrast to a rapid decline observed in China. Real estate transaction volumes and construction activities in India have also shown significant growth.
Morgan Stanley’s economics team predicts that China’s GDP growth rate is likely to be around 3.9% until the end of the decade, while India is expected to achieve a growth rate of 6.5%.
The analysts mention the long-term trends in real effective exchange rates for the Chinese yuan (CNY) and the Indian rupee (INR). They believe that the CNY has peaked in early 2021 and has weakened by 15% in the last 18 months. If this downtrend continues, it could have negative implications for the Chinese equity market due to limited export earnings stocks. On the other hand, they anticipate a break to the upside for India, signaling a shift in the stability of the real exchange rate.
From 2003 to 2020, both the Indian and Chinese markets performed similarly, often outperforming the MSCI EM index. However, since early 2021, India has significantly outperformed China, surpassing it by over 100%. Morgan Stanley considers this a structural break that favors India and recommends overweighting Indian equities compared to China in the medium term. They expect higher USD earnings per share growth and return on equity over the cycle for India.
Morgan Stanley explains that the reshuffling of preferences in its Asia ex-Japan EM basket reflects valuations that reflect the market’s recognition of India’s structural change. India has been upgraded to overweight for a structural uptrend and now holds the No. 1 position in the list.
The firm notes that India’s relative trailing price-to-book ratio and relative forward price-to-earnings ratio are above their five-year averages. Although earnings revision breadth remains negative, it has improved since the last publication. Additionally, India’s relative return on equity and trailing net margins are in line with the benchmark.
According to Ridham Desai, an analyst at Morgan Stanley, there are three main factors supporting India’s potential multi-year bull market: macro stability, strong growth, and a reliable domestic source of risk capital. These factors contribute to a strong profit cycle, lower correlation of equities with oil and US growth/Fed cycles, and a lower beta to emerging markets, all of which set India up for strong equity market performance.
In conclusion, Morgan Stanley’s analysis indicates that India’s economic prospects are currently more promising than China’s, leading to a reshuffling of preferences in their list of emerging markets in Asia.