Indian equities are set to reverse their historic underperformance against emerging market peers next year, powered by government policy actions, according to Morgan Stanley.
The BSE Sensex has 13% upside through the end of next year in a base-case scenario, strategists Ridham Desai and Nayant Parekh wrote in a note Monday. Indian stocks’ laggard performance this year is likely to “give way to significant improvement in equity returns in 2026, backed mostly by a self-help story,” they said.
India’s $5.4 trillion equity market, which is light on technology stocks relative to peers, has struggled to cope with a massive rally across Asian and emerging markets this year largely powered by artificial intelligence shares. MSCI Inc’s gauge of local equities is underperforming a broad emerging-market measure by its widest margin since 1993.
Next year “is likely to be a macro trade in stocks, a transition from the stock-picking environment of 2025,” they said.
India is set for a positive growth surprise in the coming months, the strategists said, projecting a 17% compound annual growth rate on Sensex earnings annually through the fiscal year ending in March 2028. That will be backed by a reflation effort from the central bank and the government that includes borrowing cost reductions, cash reserve ratio cuts and liquidity infusions, they said.
Although its performance has been relatively weaker, the Sensex is up more than 8% this year and trades close to its all-time high levels.
Morgan Stanley joins Goldman Sachs Group Inc, Societe Generale SA and HSBC Holdings Plc in forecasting a rebound for Indian equities.
The strategists prefer domestic cyclicals over defensives and external-facing sectors and keep an overweight position on sectors including financials, consumer discretionary and industrials, while energy, materials, utilities and health care are underweights.
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