Will largecap de-rating prove cyclical? Morgan Stanley identifies what may lift share prices

On Tuesday, October 6, Morgan Stanley characterised India as a defensive growth market and argued that recent valuation compression in large cap shares may be cyclical rather than lasting. The firm expects a major earnings cycle over the coming quarters, which it said could carry corporate profit relative to GDP to new highs and provide support for share prices. The material gives no index level, valuation multiple, earnings forecast, rupee amount or timetable beyond the coming quarters, and it identifies no individual company or sector.

The market mechanism is straightforward: sustained profit growth may raise earnings per share and allow large cap valuations to stabilise or expand without prices becoming more expensive relative to profits. India’s defensive growth label could also support relative demand for its equities, although the basis for that description is not detailed. Sector exposure cannot be specified from the information provided, nor can particular listed companies be singled out; the reading applies broadly to large caps. Stronger quarterly results and profit relative to GDP reaching fresh highs would confirm it. Weak or narrowly concentrated earnings would weaken it.