M FoundationIndia Equity Strategy Playbook | Asia PacificCan the Market Go into Bubble Territory?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 Related research F2025 Interim Budget: Positive Fiscal Surprise QE Dec-23 Earnings Thus Far Asset Returns: Equities back at the top 4Q23 Ownership Trends: Buy Banks "DREAM" Run: US$30bn in 2023 MNC Sentiment Index (3Q23): A Sequential Fall One Billion Voters: Will They Please the Market? How India Has Transformed in Less than a Decade Investor Presentation: Asia Summer School: India Equity Strategy The New India: Why This Is India's Decade Primer: A Look at India's History and the Path Ahead Indian equities continue to power ahead supported by a strong macro, corporate fundamentals and a domestic bid. We evaluate factors that could push the market into bubble territory. • The budget adds reason for the bull market to continue: The budget chooses macro stability (a recurring theme for the past decade) by contracting the deficit as the economy will likely transition to private spending as a key driver of growth. This is likely to further reduce India’s beta to the world (aka cost of equity, beta is now ~ 0.3). It allows for the gap between real GDP growth and real interest rates to rise and provide support to share prices. Of course, this depends on stronger private demand, which we think the economy is likely to experience. • Factors that create a bubble: a) Strong policy environment – continuity in the government with a majority will ensure the same; b) falling primary deficit – the stage is set for the deficit to go to zero in the coming three years; c) rising private debt to GDP – quite possible since this number has been almost flat for the past decade; d) rising profit share in GDP – we expect a new high in profit share in GDP, implying earnings growth of about 20% annually over the next 3 years led by an emerging private capex cycle, re-leveraging of corporate balance sheets and unfolding of a structural rise in discretionary consumption; e) rising real GDP growth relative to real interest rates - strong macro stability as a result of improving terms of trade, flexible inflation targeting and stable non-portfolio foreign flows is driving this outcome; f) strong liquidity or the force of the bid, which remains favorable led by a reliable domestic bid; g) a new high on sentiment – our proprietary sentiment in indicator is not yet at new highs; and, finally, h) a new high on P/E multiple – we are still 25% away from the previous high. • Vols have risen and could rise further due to: a) elections likely in April/May; b) cues from US...
