In a report, Morgan Stanley’s Ridham Desai described the current phase as a “rift between the market and the macro” and contends that this disconnect is creating a buying opportunity in high-quality Indian equities.
The brokerage notes that India’s equity market is in the midst of “its worst 12-month relative performance in history despite strong earnings delivery and macro outperformance.”
“We think this shock is behind us, though it creates adverse market plumbing for Indian stocks,” the report says, adding that this has been driven by factors such as passive outflows, hedge fund positioning, and global risk-off rather than any deterioration in domestic fundamentals.
One of the striking valuation signals Morgan Stanley highlights is the Sensex priced in gold. A long-term chart in the playbook shows the Sensex in ounces of gold on a log scale, with the brokerage concluding that “the Sensex is the cheapest ever in gold terms.” The report also points out that India’s share of global profits now exceeds its share in the MSCI EM index “by nearly the highest margin on record,” yet the market has derated on a relative basis.
Despite the recent underperformance, Morgan Stanley remains constructive on the medium-term trajectory for Indian equities. It sets a base-case BSE Sensex target of 95,000 by December 2026, implying 18% upside from current levels, and a bull-case target of 107,000, implying potential upside of 33%. “Our bull case, with 30% probability, builds in a scenario where oil stays below US$60 a barrel, India’s reflation policies succeed, global trade wars ease, and corporate earnings compound at 19% annually through FY2028,” the report states.
The probability-weighted outcome for the Sensex stands at 94,800, according to Morgan Stanley, reflecting a mix of its bull, base, and bear scenarios. The brokerage acknowledges that valuations are not cheap on conventional metrics, noting that the Sensex trades at a trailing price-to-earnings of around 23.5 times, versus a 25-year average of about 22 times, but argues that the earnings and policy backdrop justifies a premium.On the macro side, the report argues that “policy uncertainty is ending, capex is accelerating, and nominal growth is set to outpace interest rates,” creating a supportive environment for risk assets. Morgan Stanley expects “earnings growth to accelerate into 2026” as a series of policy levers are pulled, including potential RBI rate cuts, “bank deregulation, liquidity infusions, and fiscal stimuli,” which together could unwind the hawkish post-Covid macro setup. It also flags the prospect of “trade deals and a thaw in China relations” as incremental positives for India’s external environment.
The authors, led by Ridham Desai, Morgan Stanley’s chief India equity strategist, along with co-author Nayant Parekh, stress that the current market discomfort is more about flows and plumbing than fundamentals. They write that recent weakness “creates adverse market plumbing for Indian stocks, but also a buy opportunity in high-quality businesses,” arguing that domestic cyclicals and financials, in particular, stand to benefit as policy support and capex recovery play out.
In framing the rift between market and macro, Morgan Stanley juxtaposes India’s relative economic outperformance against the sharp derating in its equity market versus emerging-market peers. The report underscores that India has delivered “macro outperformance” and “strong earnings delivery,” yet finds itself at an unprecedented low on a 12‑month relative-return basis, which the strategists see as unsustainable.
That, combined with the observation that the Sensex is the “cheapest ever in gold terms,” underpins their constructive stance and the possibility that the index could climb towards 107,000 over the next couple of years if the bull case plays out.