Morgan Stanley goes underweight on India, overweight on Taiwan

It is not just the valuations and growth that is worrying the big broking and investment houses. They are also worried when a market performs exceedingly well. There is a tendency among the brokers to believe in the theory of mean reversion. That means, if something is too good to be true then it is probably not true. It looks like the mean reversion logic has once again worked against India. In its latest report, Morgan Stanley has downgraded India to “underweight” due to its outperformance compared to other EM peers on a YTD basis. However, Morgan Stanley is overweight on South Korea and Taiwan.
According to Morgan Stanley, despite the global mayhem and the headwinds of rates, inflation and recession fears; Indian markets have still managed to contain losses. However, other emerging markets have taken a sharp knock and Morgan Stanley feels that this could make other emerging markets more attractive vis-à-vis India. Consider some of the numbers. Since its peak in February 2021, the MSCI Emerging Markets index is down 40%, and this is much sharper than the average fall in the last 10 previous bear markets. According to Morgan Stanley, this does make a case for going long on EMs ex-India.
The comparison still appears to be biased towards India if you look at the performance of the markets since the start of 2022. For instance, since the start of 2022, the benchmark indices of Japan, China, Hong Kong, Taiwan and South Korea have fallen anywhere between 5% and 25%. During the same period, the benchmark Sensex and Nifty have fallen by just about 0.1%. Interestingly, even as Morgan Stanley is underweight on India, it has turned overweight on Taiwan and South Korea. It has also upgraded China to Equal Weight after the sharp correction wiped out nearly $5.2 trillion in market cap of Chinese markets.
It is hard to say whether rating Indian markets an underperformer purely based on its relative performance is a good idea. Unlike most of the South East Asian nations, India is not such an export dependent economy and most of its growth is driven by domestic drivers and the relatively vast domestic markets. Interestingly, Morgan Stanley is very bullish on the semiconductor industry in South Korea and Taiwan, which is not too surprising. However, what is more surprising is that Morgan Stanley also remains overweight on the financial sector in India. It is hard to fathom how, with its 36% weight, it would gel with underweight.