India's $10-Trillion Domestic Wealth To Anchor Bull Run, Growth Fears Unlikely To Persist

India's stock market, which is nearing its so-called 'correction zone', is in the midst of a $10 trillion positive wealth shock by households, which will "anchor the bull market", as growth fears are unlikely to persist, according to Morgan Stanley. 

Indian households have accrued $9.7 trillion in wealth in the past decade, which has far-reaching implications for macro stability and markets, strategists at the brokerage said in a note on Nov. 11. Excluding founders, the total wealth increase for households over the past decade is estimated at $8.5 trillion, the note said.

Asia's fifth-largest stock market will see more domestic equity flows along with global flows across bonds and equities, the brokerage said.

The market is in corrective mode as it is not sure whether the ongoing patch of slow growth is likely to persist or not, the brokerage said. "The key source of this has been the sharp slowing of government spending," which is already normalising, it said.

Macro stability, an earnings upcycle, and the persistent domestic bid have been the three anchors to this bull run, it said.

The Nifty corrected by 7.6% from the recent peak, while the mid- and small-cap indices corrected by 6.5% and 5%, respectively, from their recent peaks.

Global funds have sold stocks worth over Rs 1.47 lakh crore since Sept. 27, according to provisional data from the National Stock Exchange. Domestic institutions have been net buyers of shares worth Rs 1.36 lakh crore during the same period.

The implications of increasing domestic flows range from heightened discretionary consumption to greater propensity to borrow and more flows into the equity market, it said.

Strong domestic bid is the bedrock of India's financialisation, and is now "creating a virtuous cycle in the real economy by fuelling wealth creation," it said.

Constraints in bureaucracy remain the key risks in Morgan Stanley's view amid climate change and state-level fiscal challenges.

Gold is also a big wealth creator at 22% of the wealth added over the past decade, the note said. "Property is the biggest asset class both as annual flow and as value on the sheet."

Morgan Stanley prefers cyclicals over the defensive companies while favouring large-caps over small and medium cap stocks. "SMID valuations could be an issue for returns and slower global growth could impede India's growth prospects."

The brokerage is 'overweight' on financials, technology, consumer discretionary and the industrial sector.