The Indian stock markets will be the top performer among the emerging markets (EMs) despite the present volatility, according to a Morgan Stanley report.

The brokerage forecasts the Sensex to touch 93000 by December 2025.

The benchmark has given investors a return of 13.60 per cent in 2024. Both the Sensex and the Nifty touched record highs of 85978.25 and 26277.35, respectively, on September 27 but retreated sharply on account of FPI outflows andpricey valuations.

``We expect India to be among the best-performing EMs in 2025. The fundamentals are underpinned by strong macro stability as a result of improving terms of trade, flexible inflation targeting and stable non-portfolio foreign flows, forecast earnings growth of about 18-20 per cent annually over the next four to five years,’’ Morgan Stanely’s Ridham Desai, Sheela Rathi and Nayant Parekh said in the report.

Indian equities will also benefit from an emerging private capex cycle, re-leveraging of corporate balance sheets and unfolding of a structural rise in discretionary consumption, apart from a reliable source of domestic risk capital.

According to the report, the 2025 Sensex target of 93000 means that the index will trade at a trailing P/E (price to earnings) multiple of 23 times, ahead of the 25-year average of 20 times.

It pointed out that the premium over the historical average reflects greater confidence in the medium-term growth cycle, India’s lower beta (a measure of market risk or volatility), a higher terminal growth rate and a predictable policy environment.

"This level assumes the continuation of India’s gains in macro stability via fiscal consolidation, increased private investment and a positive gap between real growth and real rates."

Growth will rebound from the present quarter because of a major pickup in government spending and an expanded wedding season.

"We opine that the earnings cycle is about midway through its journey. An emerging private capex cycle, the re-leveraging of corporate balance sheets, a robust banking system, improving terms of trade both on account of a higher share in global trade and a lower share of oil in GDP, and the unfolding of a structural rise in discretionary consumption slightly offset by likely consolidation on the fiscal front are the key macro drivers of earnings."

The report recommends that investors buy cyclicals and avoid defensive stocks.

On the reasons behind a preference for domestic cyclicals, the brokerage said domestic growth is likely to stay strong and capex-driven.

However, 2025 will still be a stock pickers market with some segments yielding high alpha (return relative to a benchmark index). These include travel and select retail, luxury consumption, healthcare services and discretionary consumption such as automobiles.

“While we prefer large lenders in financials, non-lenders such as life insurance also appear attractive… Finally, industrials are likely to be led by private capex in new areas such as energy, mobility, defence, railways, electronics and semiconductors as well as conventional sub-sectors such as coal-fired power plants and, steel, the report said.