Financial stocks are in focus after Morgan Stanley highlighted that a recent spike in bond yields has dampened market expectations of another repo rate cut, weighing on sector sentiment.
According to the brokerage, the direction of interest rates remains a bigger driver of sentiment than actual earnings performance. Morgan Stanley noted that stocks have once again fallen sharply amid rising yields, reinforcing the sensitivity of financial stocks to rate movements.
However, the brokerage pointed to a key positive development emerging from 3QFY26 results, stating that asset quality has improved across its entire coverage universe for the first time in two years, without exception. Morgan Stanley described this as a more durable indicator compared with short-term rate fluctuations.
The brokerage added that the improvement in asset quality provides a strong setup for non-banking financial companies (NBFCs) to drive loan growth, which is already running stronger than the broader system, in line with the prevailing environment.
Within the sector, Morgan Stanley said its preferred large and mid-cap financials, rated Overweight, include Shriram Finance, SBI Life, AB Capital, and Bajaj Finance. Among small-cap names offering growth and deep value, the brokerage highlighted Aptus Value Housing Finance and PNB Housing Finance, both rated Overweight.
Disclaimer: This article is based solely on brokerage commentary. The views expressed are those of Morgan Stanley and do not constitute investment advice or recommendations by the publication.
