Indian equities are positioned for a robust growth phase over the coming years, despite recording their weakest trailing 12-month relative performance against emerging market peers on record, according to a strategy note by Morgan Stanley. The brokerage said improving earnings growth, rising investments, and supportive macroeconomic conditions continue to underpin the long-term outlook for Indian stock markets.

Key Findings from the Morgan Stanley Note

Morgan Stanley analysts Ridham Desai and Nayant Parekh acknowledged the recent underperformance but maintained that the market's underlying fundamentals remain robust. The brokerage believes Indian equities could deliver strong compounding returns through the remainder of the decade.

Notably, MSCI India is currently trading at a price-to-book multiple of 3.4 times — a valuation level that, according to Morgan Stanley, has historically corresponded with forward annual returns of around 11 per cent over a 10-year horizon. The brokerage also flagged that 12-month rolling corporate buybacks are nearing record highs and could soon cross nearly $10 billion on a trailing basis.

The AI Challenge and India's IT Sector

One of the most significant headwinds identified in the report is the absence of a direct artificial intelligence-linked market theme in India. As global capital flows increasingly favour AI infrastructure, semiconductor, and technology-heavy markets, Indian equities have been left at a relative disadvantage.

'The lack of a direct AI play seems to be the most persistent challenge to the equity market,' the analysts wrote.

Morgan Stanley also flagged concerns over potential disruption that AI could create for India's IT outsourcing industry, which remains closely tied to global technology spending trends. However, the brokerage added that Indian IT services firms could emerge as 'the dark horse' as global companies increasingly rely on them to build AI applications and solutions.

India as a Long-Term AI Beneficiary

Despite near-term headwinds, Morgan Stanley argued that India could eventually become a significant beneficiary of AI-driven productivity gains, citing the country's relatively low labour productivity base as a structural opportunity. This positions India differently from markets already saturated with AI-linked valuations.

This comes amid a broader global recalibration of emerging market weightings, with investors reassessing risk-reward dynamics across Asia. India's domestic consumption story and macroeconomic stability continue to differentiate it from more export-dependent peers.

What Investors Should Watch

The combination of more reasonable valuations, rising corporate buybacks, and improving earnings visibility gives the market a credible base for recovery, according to the report. However, the pace of global AI capital reallocation and its impact on Indian IT earnings will remain a key variable to monitor in the months ahead.

With macroeconomic tailwinds intact and valuations offering a historically favourable entry point, Morgan Stanley's outlook suggests the current period of underperformance may represent a setup rather than a structural decline.