Foreign brokerage Morgan Stanley has upgraded India to 'overweight' and downgraded China to 'equalweight', saying India is arguably at the start of a long wave boom at the same time as China may be ending one.
The foreign brokerage cites India's $2,500 GDP per capita (versus $12,700 for China) and positive demographic trends for the upgrade.
Household debt/GDP in India is just 19% compared with 48% for China and only 2% of Indian households have life insurance, Morgan Stanley says in a note.
"Manufacturing and services PMIs have rallied consistently since the end of Covid restrictions in contrast to the rapid fade seen in China," it adds.
India's ability to leverage multipolar world dynamics is a significant advantage, according to the brokerage. India is a member of the Quad political framework with the U.S., Australia and Japan.
"It is benefitting from a surge in inward FDI, including from US, Taiwan and Japan firms looking to its own large domestic market as well as a much-improved export infrastructure situation vis-à-vis more-efficient ports, road and electricity supply. Private equity firms are expanding in India (and ASEAN) at the same time as they are struggling with exits in China," Morgan Stanley says, adding that real estate transaction volumes and construction have broken out to the upside.
India's future, according to the brokerage, looks to a significant extent like China's past. "Our economics team thinks trend GDP growth in China is likely to be around 3.9% to the end of the decade vs. 6.5% for India. In this context, it is particularly relevant to note long-run trends in real effective exchange rates for the CNY (Chinese Yuan) and INR," says Morgan Stanley. For India, a long period of stability in the real exchange rate seems set to end with a break to the upside, the brokerage notes.
Considering Indian equities and China equities as a pair in U.S. dollar terms and using the MSCI Indices as the benchmark, the beginning of a new era of Indian outperformance compared to China appears to be dawning, says Morgan Stanley.
"From 2003 to 2020, the two markets performed remarkably in line with each other – both having a tendency to outperform MSCI EM over the cycle. From early 2021, however, India has broken out dramatically to the upside, having outperformed China by over 100%," the brokerage says.
This, according to Morgan Stanley, represents a structural break in India's favour that warrants a bias to an 'overweight' versus a bias to 'equalweight' or 'underweight' for China with the medium-term driver being significantly higher USD EPS (earnings per share) growth and ROE (return on equity) over the cycle for India versus China.
Valuations, to some extent, reflect the market's understanding of this structural change – and indeed overshot somewhat last October in India's favour, the brokerage says.
"We see a secular trend toward sustained superior USD EPS growth versus EM over the cycle, with a young demographic profile supporting equity inflows," it says.