Morgan Stanley retains ‘equal weight’ on India, reduces China ‘overweight’

Earlier in March this year, Morgan Stanley upgraded the market to equal-weight in March, as relative valuations improved from exceptionally expensive levels last October and the execution on structural opportunities looks to be improving, while earnings and growth surprise have turned positive.

Morgan Stanley maintained that the domestic demand is strong with an encouraging demographics trend, as well as surging services exports and more announced FDI going forward.

“India is also benefiting from re-shoring demand, as proven by Tesla’s proposal to set up a factory in the country. Cisco has also announced plans to build core manufacturing capabilities there, and Foxconn are expanding with Apple’s smartphone assembly expansion there,” it said.

MSCI India is now trading at +0.9 SD vs 10-year average P/B, although India has moved up to sixth place in Morgan Stanley’s APxJ/EM market allocation framework as other factors, including economic growth expectations, are supportive.

In contrast, reducing China’s overweight position, Morgan Stanley said the initial recovery momentum in the neighbour country waned visibly in April and May with services continuing to outperform manufacturing and limited recovery in the property sector.

“Our team now expects a stronger US dollar to lead to a weaker profile for CNY than we were forecasting last November. These two factors are delaying the timeline for overall earnings recovery for MSCI China,” it said.However, the global investment bank has added that these interim setbacks are now in the price to a large degree with MSCI China de-rating back to 9.3x forward P/E (at 20% discount to overall EM).

Among the Asian emerging markets, Japan remains its top pick with increased conviction on its ROE and governance turnaround, EPS revisions and valuation re-rating.

It also maintains large overweights on Korea and Taiwan with hardware expecting a new up-cycle.

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