India may catch a break in 2017

MUMBAI: Global financial services firm Morgan Stanley said that the low return environment that India seems to be trapped in may get a breather in 2017 thanks to better equity valuations and the bottoming of the growth cycle.

While demonetisation is expected to delay the much-anticipated recovery in corporate earnings growth by another few quarters, Morgan Stanley said India’s macro stability remains in its best shape in several years and policy momentum is the best since 2007. “Our proprietary sentiment indicator has still not hit the buy zone so there may be some downside in the near term and thus, the recovery from the recent damage to share prices may not be V-shaped. India’s financial conditions look easy and the inflation trajectory suggests more rate cuts are in the pipeline,” Morgan Stanley said.

According to analysts, there is a case for a big asset allocation shift towards equities by domestic investors, as valuations are looking extremely attractive.

“The last time an equivalent valuation opportunity in favour of equities arose was in June 2013. India’s valuation as compared to emerging markets is at a 26-month low. Superior growth prospects, better terms of trade, reforms and a domestic liquidity supercycle for stocks are driving India's price to earnings premium,” it  said.