Explained: Morgan Stanley’s ‘overweight’ rating for India and ‘equal weight’ for China

Being overweight is rarely ever a good thing. But in this one instance, it’s a reason to smile and celebrate. Noted global brokerage firm Morgan Stanley has upgraded India’s status to ‘overweight’, as it is of the view that the country is poised for substantial and sustained economic growth, at a time when rest of the world is slowing down. Interestingly, the firm has also downgraded its rating on China to ‘equal weight’. These adjustments come just a day after Fitch, an American credit rating agency, downgraded the US’ credit rating to AA+ from AAA, upsetting the administration. But before we put up celebratory posts on social media, here’s a better understanding of what it means to have an overweight status. Also, why did Morgan Stanley back India? Here’s what we found out. What is overweight and underweight stock rating? An overweight stock, according to an analyst, is one that they believe will perform well in the future. They believe it is worth buying, as it could outperform the broader market and other stocks in its sector. This can mean increasing in value or just not losing as much value, depending on market conditions, but it always means that the analyst believes the stock will outperform its market. It’s important to note that a stock being labelled overweight means that it can be a good stock to buy, but it still falls short of being a “buy” stock, which is a stronger recommendation than “overweight.” On the flip side, an “underweight” rating means they think future performance will be poor. Usually, the rating refers to predicted performance over the next six to 12 months. Apart from these two measures, there’s also a stock that is equal weight. This means that an equity analyst believes the company’s stock price will perform in line with or similar to the benchmark index being used for comparison. In the case of Morgan Stanley’s overweight rating for India, it primarily believes that the Indian economy will only do better in the future. [caption id=“attachment_12953352” align=“alignnone” width=“640”] A street sign stands near the Morgan Stanley worldwide headquarters building in New York. The global brokerage firm has upgraded India’s rating to overweight after it had upgraded India to equal weight from underweight on 31 March. File image/Reuters[/caption] Why the change for India though? Morgan Stanley’s upgrade comes just four months after the brokerage had upgraded India to equal weight from underweight on 31 March citing a narrowing valuation premium and a resilient economy. In fact, with this upgrade, India is now the top ranked, most-preferred market among emerging markets (EMs), the brokerage said. On Wednesday in announcing the change, the company wrote in its report, “Relative valuations have become less extreme compared to last October, contributing to this meteoric rise.” **Also read: Six great things about Indian economy right now everyone should know** It further stated, “India rises from 6 to 1 in our process, with relative valuations less extreme than in October, and India’s ability to leverage multipolar world dynamics is a significant advantage,” adding, “India is arguably at the start of a long wave boom at the same time as China may be ending one.” BJP’s Subramanian Swamy reacting to the news posted on Twitter, now known as X: “Morgan Stanley, which had put India in ‘Fragile Five’ during UPA era, upgrades India rating to overweight and downgrades China to equal-weight.” Morgan Stanley has explained that the upgrade comes on the back of certain fundamental changes in India. It stated that structural reforms over the last few years are now bearing fruit for the nation. Moreover, there have been supply-side reforms like corporate tax cuts and production-linked incentive (PLI) schemes, and regulation and formalisation of the economy that has helped in the decision to upgrade the status. The report also highlighted India’s potential for sustained superior USD earnings-per-share (EPS) growth compared to other emerging markets. This potential is driven by India’s young demographic profile, which is expected to drive equity inflows further, it added. Furthermore, the firm noted the positive trends in foreign direct investment (FDI) and portfolio flows into India. These trends are bolstered by the country’s commitment to reforms and macroeconomic stability, making it an attractive destination for global investors. And what does this signify for India? Shrey Jain, founder and CEO of SAS Online told Live Mint that Morgan Stanley’s bullish stance on India serves as an invitation not only to Indian investors but also to investors worldwide, including FIIs and rating agencies. “We can expect a continued inflow of foreign capital into the Indian market,” Jain was quoted as saying.

What about China? Morgan Stanley’s downgrade of China is another indicator that all is not well there. Earlier in July, the Asian giant’s youth unemployment rate was a staggering 21.3 per cent – a record high and the third straight month over 20 per cent. Also, it was reported earlier that China was on the brink of deflation – prices of assets and goods decrease across the economy. While this may sound good to the common man, economic experts have stated that it means a recession could be on the horizon. Morgan Stanley also pointed out that China’s easing of measures is expected to be gradual and may not be sufficient to sustain the gains in the stock market. Other key issues, including the nation’s troubled property sector and geopolitical tensions with the US, also need to improve to attract sustainable inflows, they added. Notably, Morgan Stanley has also downgraded Taiwan to equal weight, noting that valuations are stretched amid a surge in tech stocks. With inputs from agencies