Morgan Stanley Downgrades India

The downgrade is tied to escalating conflict in the Middle East, which threatens to disrupt energy shipments through the Strait of Hormuz. This critical chokepoint handles nearly 20% of global oil shipments and over 40% of India's crude imports, making the nation highly vulnerable to supply shocks. Morgan Stanley specifically highlighted India's dependence on liquefied natural gas (LNG) from Qatar, which could be disrupted. Analysts noted that Asian markets, in general, seem "too complacent" about the risks to their supply chains. For India, which imports over 85% of its crude oil, the economic stakes are high. Every $10 increase in the price of a barrel of oil is estimated to widen the country's current account deficit by 0.3-0.5% of GDP and can increase inflation by up to 40 basis points. Beyond oil, the firm pointed to India's "expensive" absolute valuations as a deterrent for international investors. The brokerage now favors markets like South Korea and Taiwan, which are considered better positioned to benefit from the current tech and AI investment cycle with more attractive valuations. This marks a significant reversal from August 2023, when Morgan Stanley had upgraded India to "Overweight." At the time, the firm cited resilient macro indicators and suggested India was at the beginning of a "long-wave boom." In the wake of the recent geopolitical flare-up, foreign investors have pulled approximately $1.3 billion from Indian equities. However, this is part of a broader risk-off sentiment in the region, with even larger outflows seen from Taiwan (nearly $7.9 billion) and South Korea ($1.6 billion) over a similar period. As part of its strategic reallocation, Morgan Stanley remains overweight on other markets, including Japan, Brazil, and Singapore.