Wall Street major Morgan Stanley has maintained its constructive outlook on Indian equities despite facing headwinds from global capital reallocation. According to Jonathan Garner, Chief Asia and Emerging Market Equity Strategist speaking at the Morgan Stanley Investor Forum 2026, the brokerage maintains an 'equal weight' stance on India while acknowledging the challenges. As reported by CNBC TV18, Garner noted that while the Indian economy has been resilient with a mid-teens year-on-year earnings outlook, it's difficult to compete against the scale of earnings growth in North Asian markets. The strategist emphasized that passive allocations are mechanically forced to buy more Taiwan and Korea, where the earnings story is strongest, while reducing exposure to India and China. In an exclusive interview with NDTV Profit on June 3, Garner stressed that India is not the primary problem among emerging markets - rather, it is the relentless outflows by foreign investors who are chasing North Asian AI stocks.
The shift in benchmark composition has been significant, with China's share in the MSCI Emerging Markets Index nearly halving from around 45% in early 2021 and the country slipping to third place. Taiwan is now the largest market in the index, followed by South Korea, while India has fallen from second-largest position to fourth, with a weight of roughly 12%. According to Garner, both India and China are now facing pressure as Taiwan and South Korea continue to gain market share, with the two North Asian markets now accounting for nearly half of the MSCI Emerging Markets Index, a record high. The strategist noted that although India's market initially benefited from investors reallocating capital away from China, this trend is now reversing. As per Morgan Stanley's 2026 mid-year outlook, the brokerage expects 40% EPS growth for MSCI EM in 2026 dropping to 9% in 2027, with new base case targets at 1,800 for MSCI EM (+5%).
Despite near-term headwinds, Morgan Stanley continues to project the BSE Sensex could reach 89,000 over the next 12 months as India emerges from a six-quarter earnings slowdown. The brokerage's Ridham Desai has set a June 2027 target of 89,000 for the BSE Sensex, implying an upside of about 20% from current levels. The target is based on the Sensex trading at a trailing price-to-earnings multiple of 23.5 times, slightly above its 25-year average of 22 times. According to Morgan Stanley, the premium valuation reflects greater confidence in India's medium-term growth outlook, the market's lower beta, a higher terminal growth rate and a stable policy environment. The brokerage's new base case targets stand at 4,300 for TOPIX (+12%) and 1,800 for MSCI EM (+5%).
The current market dynamics are being driven by the explosive AI-driven earnings growth in North Asian markets, with South Korea expected to see a staggering 230% year-on-year earnings growth this year and Taiwan pegged at a 30% or higher growth rate. As per Morgan Stanley's 2026 mid-year outlook, global capital is reallocating away from consumer-heavy markets like India, Indonesia, and Philippines, and aggressively moving into the tech-heavy markets of North Asia. Garner noted that investors are witnessing record-breaking earnings growth in North Asia, driven primarily by the upstream semiconductor and AI technology boom. The AI rally is broadening beyond just memory chips into CPUs and other adjacent AI hardware, with Morgan Stanley expecting this strong thematic environment to persist not just through 2026, but all the way through 2027. Investors likely will not see a fade in upstream AI capex growth rates until early 2028 at the earliest.
In the current market scenario, Morgan Stanley's Garner believes that the India's earnings growth story remains resilient despite the global headwinds. According to an exclusive interview with NDTV Profit on June 3, the brokerage is drawing a hard line between government-backed capex and household consumption. Investors should avoid consumer-driven counters as well as the information technology sector amid the AI boom, as semiconductors stocks and the subsequent AI trade is still largely missing from the Indian market. However, the bright spot remains public sector-enabled capital expenditure, with Morgan Stanley strongly preferring large-cap names tied to defense spending and energy infrastructure. The strategist noted that India's investment-to-GDP ratio is on track to rise to 37.5%, highlighting the robust ongoing capex story in the country. Going forward, Morgan Stanley expects continued strength in industrials, semiconductors, and upstream energy/copper, while the consumer sector will likely remain under pressure globally.
