Morgan Stanley has revised its stance on Asian equities, downgrading India to 'underweight' and trimming exposure across the region due to rising macroeconomic risks and policy uncertainty. The move follows weakening earnings momentum and elevated valuations in key sectors.
- India downgraded to 'underweight' from 'equal-weight' by Morgan Stanley
- NSEI projected to return 5.8% over 12 months—below 7.5% threshold for fair valuation
- India's fiscal deficit expected to reach 6.4% of GDP in FY2026
- Financials sector ROE declined to 10.7% in Q4 2025
- INDY ETF saw $380 million in outflows over two weeks
- Regional equity weightings reduced by 12%, with India accounting for 40% of the cut
Morgan Stanley has shifted to a more defensive posture on Asian equities, downgrading India to 'underweight' from 'equal-weight' and reducing its regional equity allocation. The firm cited persistent inflationary pressures, slowing GDP growth, and a widening current account deficit as primary concerns, particularly for India, where real GDP growth is projected at 6.1% in FY2026—below the 7% threshold historically considered sustainable for equity outperformance. The downgrade affects key India-specific instruments, including the INDA index, which has underperformed the broader EEM (iShares MSCI Emerging Markets ETF) by 9.3% year-to-date. Within India, financials and industrials—two of the largest sectors in the NSEI (Nifty 50)—have seen margin compression, with banking sector ROE falling to 10.7% in Q4 2025, down from 13.4% a year earlier. Technology stocks, while holding stronger fundamentals, face rising regulatory scrutiny and export headwinds. The firm’s regional outlook now reflects a 12% reduction in target weightings for Asian equities, with India accounting for 40% of the cut. This has triggered immediate responses in ETF flows: INDY, the iShares India ETF, saw net outflows of $380 million in the past two weeks, while EEM posted a 3.1% decline in one-day trading volume. Market participants anticipate further rebalancing from passive funds tracking broad Asian benchmarks. Morgan Stanley’s revised view underscores deeper structural challenges, including fiscal deficits exceeding 6.4% of GDP and a reliance on foreign capital inflows that remain volatile amid shifting U.S. monetary policy. The firm now forecasts a 5.8% return on equity for NSEI over the next 12 months—below the 7.5% threshold needed to justify current valuations.