Indian Stock Market Faces Steepest Decline Against Emerging Markets Amid Morgan Stanley's Optimistic Outlook

Indian Equities Struggle Amidst Weakening Sentiment, Despite Underlying Fundamentals

Morgan Stanley analysts Ridham Desai and Nayant Parekh have flagged India's lack of a direct artificial intelligence (AI)-linked market theme as a major concern, contributing to the country's weakest trailing 12-month relative performance against emerging market peers on record.

According to a strategy note by Morgan Stanley, India's equity market has struggled to keep pace with its global peers, despite a strengthening corporate profitability and long-term growth expectations. The brokerage attributed this weakness to the absence of a direct AI play, which has become a major theme in global markets, with global capital increasingly shifting toward AI infrastructure, semiconductor, and technology-heavy markets.

Fundamentals Turn Favourable

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However, Morgan Stanley noted that several underlying indicators are turning favourable for Indian equities. The brokerage highlighted that 12-month rolling corporate buybacks are approaching a record high and could soon exceed a trailing sum of nearly $10 billion. This is a positive sign, as corporate buybacks can indicate a company's confidence in its own shares and can boost the overall market sentiment.

Morgan Stanley also pointed out that valuations have moderated, with the MSCI India trading at a price-to-book multiple of 3.4 times. Historically, such valuation levels have implied relatively predictable 10-year forward annual returns of around 11 percent.

Earnings Growth to Accelerate

The brokerage expects earnings growth to accelerate sharply over the next two years, with broad market earnings growth projected to rise from 10 percent in FY26 to 22 percent by FY28. This growth is supported by domestic investment activity and sectoral expansion.

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Investment Cycle Remains Key Support

Morgan Stanley expects India's investment-to-GDP ratio to rise to 37.5 percent over the next five years, driven by capital expenditure across sectors including energy, defence, semiconductors, fertilisers, and data centres. The brokerage said that India contributed around 18 percent of global GDP growth in 2025 and expects this contribution to increase further over the coming years.

Macroeconomic Outlook Remains Supported

According to the report, India's macro backdrop remains supported by relatively modest real interest rates, fiscal stability, and an undervalued currency. Morgan Stanley also noted that India's oil intensity has declined significantly over time, reducing some of the economy's historical sensitivity to oil price shocks, although the country remains dependent on crude imports.

Risks Remain

The brokerage identified prolonged geopolitical tensions in West Asia as one of the key risks to India's macro outlook. Other risks highlighted in the report included weak monsoons, low farm productivity, judicial capacity constraints, and sustained high crude oil prices.

Morgan Stanley's Investment Strategy

The brokerage said it remains "capitalisation-agnostic" and is currently favouring domestic cyclicals over defensive and externally exposed sectors. Morgan Stanley holds overweight positions in financials, consumer discretionary, and industrials, while remaining underweight on energy, utilities, materials, and healthcare.

Sensex Forecast

Morgan Stanley said there is a 25 percent probability that the Sensex could rise to 100,000 if oil prices fall below $80 per barrel and corporate earnings compound at 19 percent annually between FY26 and FY29. Conversely, the brokerage assigned a 25 percent probability to the Sensex falling to 66,000 if oil prices remain above $120 per barrel, forcing the Reserve Bank of India to tighten monetary policy aggressively to preserve macroeconomic stability.