M UpdateIndia Equity Strategy | Asia PacificEvents to Watch: 1Q24 – Sweet Conditions Morgan Stanley India Company Private Limited+Ridham DesaiEquity Strategist Ridham.Desai@morganstanley.com +91 22 6118-2222 Sheela RathiEquity Analyst Sheela.Rathi@morganstanley.com +91 22 6118-2224 Nayant ParekhEquity Strategist Nayant.Parekh@morganstanley.com +91 22 6118-1008 Morgan Stanley appreciates your support in the 2024 Institutional Investor All-Asia Research Team Survey. Voting will open early January 2024. Exhibit 1 : Low Volatility for Indian Equities10152025303540Jan-20Mar-20May-20Jul-20Sep-20Nov-20Jan-21Mar-21May-21Jul-21Sep-21Nov-21Jan-22Mar-22May-22Jul-22Sep-22Nov-22Jan-23Mar-23May-23Jul-23Sep-23Nov-23Nifty volatility index (VIX)S&P volatility index (VIX) Source: Bloomberg, Morgan Stanley Research Exhibit 2 : India vs. EM – Relative Performance -20%-10%0%10%20%30%40%50%60%Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19Sep-19Jan-20May-20Sep-20Jan-21May-21Sep-21Jan-22May-22Sep-22Jan-23May-23Sep-23MSCI India performance relative to MSCI EM - USD Source: RIMES, MSCI, Morgan Stanley Research.Domestic macro data remain strong albeit the market is likely to move on global conditions and local politics to the end of the first quarter of 2024. Short rates: While in our base case, RBI's shallow rate cutting cycle begins in June next year, a surprise rate cut could come if the US Fed cuts rates ahead of our expectations and domestic fuel prices are cut as Brent heads into the 70s. Terms of trade: India's terms of trade could be under some pressure in the ensuing quarter given slowing world growth and a strong domestic economy. However, with US yields peaking, some reversal in flows is possible. Coupled with the flows associated with India's inclusion in the JP Morgan EM Bond Index, we think the BoP is likely to remain benign. Global stock markets: Our strategists are opining for modest equity returns albeit India remains in a sweet spot with a low beta equity market. If US stocks continue to rally, Indian equities will possibly underperform although continue to rise in absolute terms. Within Indian equities, mid- and small-cap stocks look rich relative to large caps. Earnings: The quarter ending December is likely to be strong. Our F2024 EPS estimates are above consensus and the ongoing lift in capital spending is acting as a key source for upside to consensus estimates. The bid vs. offer: Domestic flows are likely to be sustained in the coming months, though there could be more volatility in FPI flows for the reasons cited above. Pertinently, higher primary market activity could moderate the bidding for shares. Politics: The most important catalyst in 1Q24 is the market’s view on the 2024 general election outcome. With the state elections producing a polarized result, our view that the market will likely price in continuity and a strong government gets reaffirmed....
