India Equity Strategy Playbook The Walls of Worry-110155280

M FoundationIndia Equity Strategy Playbook | Asia PacificThe Walls of WorryMorgan Stanley India Company Private Limited+Ridham DesaiEquity Strategist Ridham.Desai@morganstanley.com +91 22 6118-2222 Sheela RathiEquity Analyst Sheela.Rathi@morganstanley.com +91 22 6118-2224 Nayant ParekhEquity Strategist Nayant.Parekh@morganstanley.com +91 22 6118-1008 Related research 1FQ25 Earnings – Final Cut: Modest Expectations Met "DREAM" Run: Inflows across the Board 2Q24 Ownership Trends: Domestic Ownership at New High F2025 Budget: Balancing Macro Stability & Growth India Strategy and Economics: INR: A Springboard for Strength MNC Sentiment Index (2Q24): Sentiment Softens India Equity Strategy and Economics: Modi 3.0: This Remains India's Decade Investor Presentation: Asia Summer School: India Equity Strategy When Will Indian Equities De-rate? The New India – Railways: Rolling India Forward The New India – Infrastructure: An Ongoing Transformation The New India: Why This Is India's Decade There are many sources of correction for this strong bull market - both fundamental and technical. Of course, this does not mean that the bull market is over (we think we are only past the halfway mark) but a correction will test money in the market and possibly excite money on the sidelines.• The market continues to climb the wall of worry leaving many professional investors perplexed: As we opined last month, we are still not at a bull market peak as we are not yet seeing the confluence of excess leverage (market and economic agents), profits, prices, valuations and sentiment expected at such a point. That said, bull market corrections are always around the corner, and we examine potential catalysts for these. • Sources of correction: Valuation, on its own, is never a reason for stocks to correct, but elevated valuations become a catalyst when other fundamental and sentiment events unfold. Two fundamental events to keep an eye on in our view are: a) a potential growth slowdown as for the first time since COVID-19 both monetary and fiscal policy are likely to be tightening; if global growth slows down, it will likely cause domestic earnings to surprise to the downside (consensus is already lowering estimates); and b) state-level profligacy causes the mix of state-level spending to shift adversely towards redistribution with concomitant risks to inflation and its volatility (state elections assume unusual importance in this context). The two technical risks to monitor in our view are: a) the possibility that the retail bid on equities shifts to the primary market as equity issuances surge; and b) even though India remains poorly correlated to global markets, such correlations can change quickly if there is a sharp sell-off outside India, especially in the US. • Where is the next leg of the bull market coming from: Fiscal consolidation is creating space for private borrowing and spending to fuel the next leg of earnings growth and simultan