New Delhi [India], January 8 (ANI): Indian equities are positioned for further upside in 2026, supported by resilient economic growth, improving earnings visibility and supportive domestic policy dynamics, according to a report by Morgan Stanley.

In its latest India Equity Strategy Playbook, Morgan Stanley expects Indian stocks to surprise on the upside going forward.

'We see a sharp turn in earnings growth over the coming months,' the report noted.

The report finds that India provides a durable foundation for equity returns, even amid global uncertainty.

Morgan Stanley said India's macro stability stands out at a time when many global markets are grappling with slowing growth and tighter financial conditions.

Strong domestic demand, ongoing public capital expenditure and structural reforms have helped insulate the economy from external shocks. As a result, India's equity story is increasingly driven by internal fundamentals rather than global risk sentiment.

Earnings growth is a key pillar of the bullish outlook. Morgan Stanley expects corporate profit expansion to broaden beyond a narrow group of large-cap stocks, supported by improving balance sheets, easing input-cost pressures and stronger operating leverage.

The firm noted that a recovery in private-sector investment, alongside continued government spending on infrastructure, could further lift earnings momentum across sectors.

Valuations, while no longer cheap, remain reasonable relative to India's growth prospects, Morgan Stanley said.

The firm highlighted that India continues to command a premium versus other emerging markets, reflecting superior growth visibility, policy credibility and the depth of domestic capital markets.

Flows are another source of support. Morgan Stanley expects domestic institutional investors to remain a stabilising force for the market, helping to offset periods of foreign portfolio outflows. Rising household participation in equities, channeled through systematic investment plans (SIPs) and retirement savings, has strengthened the local bid for stocks and reduced volatility during global risk-off episodes.

Policy continuity is also central to the outlook. Morgan Stanley said a stable political and policy environment underpins investor confidence, encouraging long-term capital allocation into Indian equities. Structural reforms in manufacturing, digitalisation and financial inclusion are expected to continue enhancing productivity and broadening the earnings base.

Overall, Morgan Stanley sees Indian equities entering 2026 with a favourable risk-reward profile. While short-term volatility cannot be ruled out, the firm believes India is well placed to outperform over the medium term, driven by what it describes as an emerging 'upside surprise' in growth and earnings. (ANI)