Mumbai: Indian equities is expected to stage a strong recovery over the next year, supported by a clear policy shift from the government and improving economic conditions, a new report said on Tuesday. Global brokerage Morgan Stanley believes that the worst phase of the mid-cycle slowdown is now behind the market, and that earnings growth will strengthen in the months ahead.
According to its latest report, India’s long-term growth story is becoming stronger with recent policy actions. The brokerage said most risks to its view come from outside India, while domestic fundamentals remain solid. It also noted that 2026 is likely to be a “macro trade” year, marking a shift from the stock-picking environment that dominated 2025. Morgan Stanley highlighted that favourable policies are boosting expectations of a recovery in nominal growth, which will help lift corporate earnings.
It added that India’s relative valuations are supportive of better performance, and foreign portfolio investors currently have their lightest exposure to India in history. With domestic investors continuing to participate actively, the brokerage believes Indian equities are well-placed to deliver strong returns. It also pointed out that Indian markets are set to reverse their weakest performance relative to emerging markets in three decades. The report forecasts a 13 per cent upside in the BSE Sensex by December 2026 in the base-case scenario.
This outlook assumes continued macro stability driven by fiscal consolidation, higher private investment, steady domestic growth, stable global conditions, and favourable oil prices. Morgan Stanley also expects the India-US tariff issues to be resolved soon. Its base case includes a 25-basis-point cut in short-term interest rates and a liquidity-friendly monetary environment. The brokerage projects a 17 per cent compound annual growth rate in Sensex earnings through FY28.
However, it warned that the biggest risk to India’s market outlook remains the possibility of a global slowdown. Even though India could still outperform in a global selloff due to its low market beta, such a situation would limit absolute gains in stocks. Concerns among market participants about increased share issuance, weak trailing returns, high valuations, growth uncertainties and India’s slower progress in the AI space were dismissed by the brokerage as largely misplaced.
On the portfolio strategy front, Morgan Stanley said domestic cyclical sectors are likely to outperform defensive and external-facing sectors. It recommended overweight positions in financials, consumer discretionary and industrials, while advising underweight exposure to energy, materials, utilities and healthcare.
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