After the worst trailing twelve-month relative performance in history, Morgan Stanley sees India poised for a strong year — here is the full case, and the risks that could derail it
There are moments in markets when the setup for a contrarian call becomes almost textbook — when sentiment is near an extreme, relative performance is at historic lows, foreign positioning has been unwound, and the fundamental picture is quietly turning. Morgan Stanley’s India equity strategy note argues that this is precisely that moment.
“Indian equities are poised for a strong year ahead,” the report states — a conclusion that arrives at a time when most global investors have spent the better part of twelve months reducing India exposure.
The Earnings Turn
The starting point is corporate earnings. India has just come through a six-quarter mid-cycle slowdown in earnings growth — a period that drove significant apathy toward the market from global allocators. Morgan Stanley’s central argument is that this slowdown is over. “Earnings growth is turning after a six-quarter mid-cycle slowdown and is likely to accelerate further,” the report says, driven by a combination of reflationary policy actions — RBI rate cuts, bank deregulation, liquidity infusion — and a fiscal backdrop that is supportive rather than restrictive, including what the report describes as “large tax cuts and relatively stimulating fiscal.”
Beyond monetary and fiscal policy, the report points to a capex cycle that is broadening in its scope. Energy, defence, semiconductors, fertilizers and data centres are all seeing strong investment trends — a set of sectors that generate durable demand for domestic businesses across the industrial and financial ecosystem. Trade deals with the US and the EU, combined with a thawing of India-China relations, add external tailwinds to a domestic growth story that is already inflecting.
The Valuation and Positioning Setup
Trailing twelve-month relative performance is described as “the worst in history.” Relative valuations are at previous troughs. Foreign positioning is at multi-year lows. And India’s share of global corporate profits now exceeds its weight in global indices by the highest margin ever recorded — outside of 2009.
Each of these data points, taken alone, would be interesting. Together, they describe a market where the bad news is thoroughly priced in and the incremental surprise is more likely to be positive than negative. The Indian rupee adds another layer — the report notes the currency is undervalued on a real effective exchange rate basis, meaning foreign investors who return to India get both the equity and currency upside. Domestic equity flows, meanwhile, are “stronger than ever” — providing a structural bid that absorbs FII selling without the market dislocating.
The Structural Story
Beyond the near-term earnings and positioning case, Morgan Stanley makes a longer-duration argument about India’s structural position in a changing world. Manufacturing as a share of GDP is expected to rise over the coming decade as supply chains continue to diversify away from single-country dependence. India was 18% of global GDP growth in 2025 — a number the report expects to be higher in coming years.
The demographic angle is straightforward but powerful: a large, young and increasingly affluent consumer base is the engine of domestic demand across discretionary spending, financial services and infrastructure. Energy infrastructure is growing rapidly, and the report flags that this could fuel a boom in data centres — a theme that has been largely associated with the US and China but is increasingly relevant to India.
Perhaps most interestingly, Morgan Stanley makes a case for India as a beneficiary of AI rather than a victim of it. “Given the low starting point of labour productivity, India is a major beneficiary of AI-led productivity gains,” the note argues. And on IT services — a sector that has been under a cloud over AI disruption fears — the report offers an unexpected framing: “IT services could be the dark horse as the world pivots to these companies to build AI applications and solutions.” It is a contrarian view on a sector the market has been underweighting.
The Position
The portfolio positioning flows directly from the macro thesis. Domestic cyclicals are preferred over defensives and external-facing sectors. The overweights are financials, consumer discretionary and industrials — all direct beneficiaries of a domestic growth reacceleration, reflationary policy and a strengthening consumer. The underweights are energy, materials, utilities and healthcare. Morgan Stanley is capitalization-agnostic — making no strong call between large, mid and small caps — which is itself a signal that the opportunity is broad rather than concentrated in any one segment of the market.
The Risks Are Real
Externally: geopolitical tensions and slowing global growth remain the most significant threats, with the report noting that India still needs to import oil despite its significantly lower oil intensity compared to previous cycles. The lack of a direct AI play in the Indian market — beyond the IT services angle — is described as “the most persistent challenge to the equity market,” with potential AI disruption for Indian services exports adding further uncertainty.
Domestically, the report flags low productivity in farming, capacity constraints in the judiciary, and the risk of embodied AI hitting Indian labour markets — structural challenges that are not easily resolved by policy and that could act as a brake on the broader growth story if not addressed over the medium term.
Morgan Stanley’s India playbook is ultimately an argument that the market has over-corrected — that twelve months of relative underperformance and FII selling have created a setup where the risk-reward is unusually attractive for investors willing to look past near-term noise. The earnings cycle is turning.
The policy backdrop is supportive. Positioning is light. Valuations are at troughs. And India’s structural story — manufacturing growth, demographic dividend, AI productivity upside — remains as compelling as it has ever been. For long-term wealth builders with India in their portfolio, this is the kind of market that beckons rather than a quick scroll.