Mumbai, Nov 18 (NationPress) Indian stock markets are anticipated to witness a robust recovery within the upcoming year, driven by a decisive policy shift from the government alongside enhancing economic circumstances, as per a recent report released on Tuesday.

Global financial firm Morgan Stanley asserts that the most challenging period of the mid-cycle slowdown is now behind the market, with expectations of strengthened earnings growth in the coming months.

The report emphasizes that India’s long-term growth narrative is gaining traction due to recent policy initiatives.

Morgan Stanley indicates that the primary risks to this outlook are external, while the domestic fundamentals remain strong.

It also projects that 2026 is likely to be a year characterized by 'macro trades', indicating a departure from the stock-picking landscape that defined 2025.

Favorable government policies are enhancing expectations for a recovery in nominal growth, which is expected to contribute to higher corporate earnings.

Furthermore, the report mentions that India’s relative valuations are poised to support improved performance, with foreign portfolio investors currently holding their lowest exposure to India ever.

With local investors participating actively, Morgan Stanley believes that Indian equities are in a prime position to yield substantial returns. The brokerage noted that Indian markets are on track to rebound from their weakest performance compared to emerging markets in three decades.

The report anticipates a 13% increase in the BSE Sensex by December 2026 under a base-case scenario. This forecast relies on sustained macroeconomic stability fueled by fiscal consolidation, enhanced private investment, steady domestic growth, stable global conditions, and favorable oil prices.

Morgan Stanley also expects resolutions concerning India-US tariff disputes in the near future. Its base case includes a 25-basis-point reduction in short-term interest rates alongside a liquidity-friendly monetary environment. The brokerage projects a 17% compound annual growth rate in Sensex earnings through FY28.

However, it cautions that the most significant risk to India's market outlook remains the threat of a global economic slowdown. While India could still show resilience during a global downturn due to its low market beta, such circumstances may limit absolute gains in stocks.

Concerns among market participants regarding increased share issuance, weak trailing returns, high valuations, growth uncertainties, and India’s slower advancement in the AI sector were dismissed by the brokerage as largely unfounded.

On the portfolio strategy front, Morgan Stanley predicts that domestic cyclical sectors are likely to outperform defensive and externally-focused sectors.

It recommends an overweight position in financials, consumer discretionary, and industrials, while advising a reduction in exposure to energy, materials, utilities, and healthcare.