India's outperformance could cause FPI flows to return

India has been "remarkably resilient" in the recent turmoil in emerging market equities largely driven by macro stability, low policy uncertainty, improving growth and domestic flows, says a Morgan Stanley report.

According to the global brokerage firm, though foreign investors have trimmed their stake, the domestic equity market's outperformance could cause FPI flows to return.

"Domestic equity flows are in the midst of a structural uptrend and though FPIs have trimmed their India weight to 2011 lows, India's outperformance could cause FPI flows to return," Morgan Stanley said in a research note.

Morgan Stanley in its base case (50% probability) expects June 2019 Sensex at 36,000, while in the bull case (30% probability) it could be at 44,000 and in bear case (20% probability) it could be at 26,500.

The 30-share Sensex is currently hovering around 38,000 level and has jumped over 11% so far this year.

The global brokerage major said, "India's policy environment has defied expectations and remained relatively benign despite the coming elections in 2019".

It further said that the central bank's commitment to keeping real rates positive is also positive for the markets.

The report further noted that India's growth is likely to accelerate relative to emerging market equities.

"Indeed, India's corporate profit share in the GDP is at close to all-time lows which means the up cycle could be quite significant, a contrast to most other parts of the world," it said.

Some of the major risks for the domestic equity market performance include a recovery in emerging market equities, as this could end India's outperformance while a collapse could lead India to fall like quality stocks do when in a bear market, it said.

Moreover, the election cycle, "which brings its own set of uncertainties such as inflation from food prices or fiscal slippage", is another major risk factor for the equity market going forward, the report added.