'Market Has Become Excessively Bearish On India'

'When I look at India's relative valuations, these are by far the lowest I have seen in my 35-year career.'
'The relative 12-month trailing performance is among the weakest I have seen, and foreign investor positioning is at a 16-17 year low.'

As global investors gravitate towards markets, such as South Korea and Taiwan, Indian equities have slipped down the pecking order.

The gloom around India is more about relative growth than absolute growth, says Ridham Desai, managing director and chief equity strategist India, Morgan Stanley.

In an interview with Samie Modak and Sundar Sethuraman/Business Standard in Mumbai ahead of the Morgan Stanley India Investment Forum 2026, Desai argues that investor positioning has turned excessively bearish.

But the outlook could soon start becoming more constructive.

There seems to be growing pessimism around India among foreign brokerages and investors. What's driving this sentiment?

The pessimism is largely about India's relative growth not absolute growth. India's economy has improved over the past two quarters, but compared to markets like the US, South Korea, Taiwan and even Japan, growth still looks less compelling.

What's driving global growth right now is a massive artificial intelligence-led investment cycle -- particularly around data centres, semiconductors, memory chips, energy infrastructure and construction.

The top US hyperscalers are expected to spend nearly $800 billion in capex this year and over $1 trillion next year.

India is not yet fully integrated into this AI supply chain, which means it is not participating in the growth impulse to the same extent.

Apart from relative growth, what else is weighing on investor sentiment towards India?

The second big concern is around AI's potential disruption to India's services-export model. India's economy is heavily dependent on services exports, and there is a growing perception globally that AI could replace a significant portion of that work.

I personally disagree with that view, but markets are currently worried that AI could hurt India's medium- to long-term growth prospects.

This is happening simultaneously with foreign portfolio investor (FPI) outflows and rising overseas investments by domestic companies, which together are putting pressure on the balance of payments (BoP).

Higher energy imports are adding to the strain.

Do you think these concerns are temporary, or could they persist?

The AI capex cycle is clearly here to stay for some time. However, the concerns around India's services exports will gradually ease as data starts proving otherwise.

In fact, the April services-export data surprised positively, and global technology companies continue to expand hiring in India.

That suggests they still see India as the best place to access skilled talent at scale. My own view is that AI could actually become a major opportunity for India's services sector rather than a threat.

How do you see earnings growth trajectory evolving over the next year?

India introduced substantial stimulus over the past year through tax cuts, rate cuts and liquidity support. The impact is now beginning to reflect on earnings and should strengthen further, going ahead.

If the West Asia conflict does not prolong, India's relative growth gap versus global peers should narrow.

Once that happens, capital outflows should moderate and the BoP situation should improve as well.

Interestingly, while foreign investors have been selling Indian equities, foreign debt flows have remained positive over the last few months.

India's potential inclusion in the Bloomberg Bond Index is a significant positive trigger.

Some administrative issues related to investor registration, trading windows and withholding tax still need to be resolved.

If those are addressed, India could see inflows of nearly $30 billion into bonds. A revival in the initial public offering (IPO) cycle would create fresh supply in the market and could encourage foreign investors to return.

In that sense, stronger IPO activity can ironically help revive FPI buying.

How attractive are Indian equities at current valuations?

When I look at India's relative valuations, these are by far the lowest I have seen in my 35-year career.

The relative 12-month trailing performance is among the weakest I have seen, and foreign investor positioning is at a 16-17 year low.

That is why I believe the market has become excessively bearish on India.

From a contrarian perspective, this is usually the point where investors should start turning constructive.

If you take a longer-term view -- say four to five years -- I think India is the most attractively-valued equity market in the world.

What risks could derail this bullish outlook?

The biggest risks are external. One possibility is a global crisis triggered by excessive debt or problems emerging from the AI capex boom.

Global debt levels are elevated, though it is difficult to predict when that becomes a problem. Domestically, however, balance sheets are in very good shape -- corporate, household and government finances are all significantly healthier than in past cycles.

How serious is the macro risk from rising oil prices and the Middle East conflict?

The situation today is very different from crises like 1991, 2008 or even 2013. India's oil intensity has fallen sharply over the past decade.

In 2008, oil imports were annualising 13 per cent of GDP in July. Today, with oil at $100 a barrel, the oil import bill is below 4 per cent of GDP.

So oil alone is no longer a systemic threat to India. The risk mainly comes through currency depreciation.

The currency depreciation is an effect the accumulation of rising energy bill, FPI outflows and outward FDI.

The consequent impact is a rise in inflation especially if the conflict drags on for an extended period.

You've spoken about a large upcoming investment cycle in India. Which sectors will drive this?

I see five major areas driving capex over the next few years: energy infrastructure, fertilisers, semiconductors, data centres and defence manufacturing.

We expect India's investment-to-GDP ratio to rise from 31.5 per cent to 37.5 per cent over the next five years.

That should drive a significant increase in corporate profits as a share of GDP.

Which sectors look most attractive from an investment perspective?

From a valuation standpoint, financials look the most attractive. The sector has gone through a difficult period, but we are now seeing improving growth, likely stable margins and low credit costs.

From a growth perspective, consumer discretionary looks strongest -- especially autos, real estate, retail, travel, healthcare and education.

Industrials have the strongest growth outlook because of the capex cycle, though valuations there are already rich.

What is your view on the IT sector amid AI disruption concerns?

IT is the dark horse. The next few quarters could remain challenging because global companies are trying to demonstrate AI integration while cutting technology spending elsewhere.

But over the longer term, India remains the most cost-effective place in the world to build AI-related solutions.

AI reduces coding costs, but that actually expands the addressable market for Indian IT companies.

IT services companies are engineering firms, not just coding firms. AI is a tool that improves productivity.

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Feature Presentation: Aslam Hunani/Rediff