Speaking to ET Now, Garner said Indian earnings growth has been weaker than widely assumed, creating room for a rebound. “For the broad market, earnings growth has been closer to 5–7% for the Sensex in the year just ended. We now see a cyclical upswing coming, with mid- to high-teens earnings growth over the next two years,” he said, adding that this would likely exceed earnings growth across emerging markets overall.
Valuations look less stretched on a forward view
Addressing concerns that India’s growth is already priced in, Garner noted that valuation premiums have narrowed sharply. Based on a two-year forward target of 95,000 for the Sensex, Indian equities are trading at around 18 times forward earnings, compared with roughly 13 times for emerging markets in aggregate. “At the peak, India was trading at nearly twice EM valuations. That gap has compressed meaningfully,” he said.
Despite sustained foreign institutional investor (FII) outflows, Garner pointed out that dedicated emerging market funds are now slightly underweight India—the most negative positioning in nearly a decade. “That actually sets up the potential for flows to reverse if the earnings cycle turns,” he said.
Policy easing and capex revival key to earnings recovery
Garner attributed the anticipated earnings upswing to multiple domestic factors, including monetary easing by the Reserve Bank of India, improving regulatory conditions, and early signs of a revival in the capital expenditure cycle. He acknowledged that nominal GDP growth—crucial for driving revenues and earnings—has been weak, even though real GDP growth remains strong.
“Inflation is tracking below 2%, which is extremely low. That has dragged down nominal GDP growth, but it also creates room for policy support,” he said.
Budget, fiscal position and currency remain supportive
On fiscal risks ahead of the Union Budget, Garner said India is likely to pursue a modest fiscal consolidation, targeting a deficit of around 4.2% of GDP. He described India’s macro position as “very strong,” citing a stable current account, healthy foreign exchange reserves, and a currency trading below its real effective exchange rate trend.“These factors make India an interesting and relatively resilient story in a very uncertain global environment,” he said.
Sector preferences: financials, industrials, consumption
Within Indian equities, Morgan Stanley remains overweight on financials, industrials and consumer discretionary stocks. Garner said India’s young and urbanising population continues to support modern consumption patterns, making it “somewhat unique among large global economies”.
However, he expressed caution on IT services stocks, citing uncertainty around how artificial intelligence adoption could affect traditional revenue models. “IT services is not a sector we are particularly enthusiastic about at this stage,” he said.
Within financials, Morgan Stanley prefers private sector banks and non-bank financial companies over PSU banks, highlighting the potential for AI-led cost efficiencies to drive profitability. The firm’s focus list includes ICICI Bank and Bajaj Finance.
Global context: China, tariffs and commodities
Comparing India with China, Garner said China’s nominal GDP growth remains weak and lacks clear catalysts for a broad cyclical recovery, despite selective opportunities in areas such as AI. On US trade policy, he noted that Asia has largely settled into a tariff equilibrium with the US, and India’s manufacturing exports to the US remain a small share of GDP.
On commodities, Garner said Morgan Stanley remains constructive on gold, driven by rising demand for real assets among pension funds and private investors amid high global debt levels and fiscal deficits.
Outlook: India among preferred EM markets
While Morgan Stanley has reduced risk exposure after four years of Indian market outperformance, Garner said India remains one of the firm’s preferred markets for the year ahead, alongside Brazil, the UAE and Singapore.
“The key question is whether this cyclical downturn in India—which surprised us in its intensity—now abates and improves. If it does, India should once again stand out within the Asia and emerging market universe,” he said.