The Hindu Business Line : Rates in India, China may nudge up: Morgan Stanley

He says that India is showing signs of medium-term development, and that India should trade at higher multiples vis-à-vis other emerging markets. In his opinion, the liquidity situation in India is good, but is slightly receding.

Excerpts from CNBC - TV18's exclusive interview with Mr Malcolm Wood:

Are you bit surprised to see our markets at 13,700?

Certainly, I am surprised to see India at 13,700. It has been a great rally, but I think that goes for the region. We have been bullish on the regional market but the spread of this rally has surprised even us.

We had an Index target for the region we thought was comfortably in double digit returns for next 6-12 months - and we are almost there in about six weeks. So things have certainly surprised in terms of the speed of moves.

Is there something different about movement in India this time - is it part of an emerging market move? When you talk to people, are you seeing optimism different from past rallies because it is not fizzling out like a lot of people are thinking, arguing the valuation metric?

It is right to say that India has been true to form. It has been a high bidder market, so global markets have been running hard and India, as a high bidder market, has outstripped them. So in that sense it has been true to form.

Another factor that has been similar to the past has been the liquidity driven nature of this rally. We have had the US Fed's step to the side, a lot of Asian central banks have stepped to the side as well, and in that context, liquidity that is looking for a home is obviously migrated to places where it sees premium returns, and India is one of those.

Which brings me to the other explanation, that is India is moving to a higher degree level of growth. That would be the secular positive view school and there are certainly a lot of people falling in that category - investors interested in real estate, infrastructure all those sorts of areas that will be necessary to drive India's growth in the medium term.

Are those areas you are looking at more carefully in India - real estate and infrastructure?

One of the things that we saw at the Asia Summit last week was what I call a trickle down which is interesting. In second and third tier cities not just in India but in China, Indonesia and even in the Philippines we are seeing interest in micro-credit going into the rural and regional parts of Asia.

There is also the whole micro prepaid low-cost mobile phone phenomena, of course the ever cheap consumer durables which are benefiting folks living in India and China and Indonesia as well. I think this is a regional phenomena. Obviously, India is one of the best ways to play this social trickle down effect, but it is regional.

In that case, is there a case to be made for upping the earnings expectations of India as a market because perhaps all these sectors you talked about are better represented in India as an equity market maybe versus the other BRIC countries.

I am not sure in terms of comparisons with Brazil and Russia, but certainly you have got good representation in China with a lot of Chinese companies going into the second tier cities as well. Nonetheless, it is fair to say that when I talk to global investors, the level of interest in India and China is at very high levels.

Lots of folks came to our conference in Singapore last week looking at Asia for the first time, and specifically interested in those two markets. So that phenomena continues.

What is your prognosis from here then? After hearing out these investors, do you think there is a long term re-rating of this market which could settle in a higher valuation band or do you think that it is pretty much like a boom-bust kind of market?

I am going to put a foot in both camps to answer this question. I do think that India is showing signs of developing industries where there is this medium term competitive advantage for India. The IT services businesses continue to surprise global leaders with their rates of growth.

Having said that, everything has got a value. I think the market has gone to price a lot of what is cyclical growth in India as secular. We think that that differentiation should lead at some point to the market pulling back to more reasonable valuations.

Reasonable valuation that will probably still look relatively high in a global context. Therefore, foot in both camps. I do think that India should trade at a higher multiple say vis-à-vis other markets in the region, but even so, if you look at Indian valuations today they are at extreme premiums to the rest of the region.

Part of this of course is being fuelled by liquidity. How are you mapping emerging market in India and liquidity for the next three months just in the near-term?

It's very difficult to call it the end of the liquidity boom. We have seen the US Fed go on hold and looking at the housing stats numbers its difficult to envisage whether the Fed is coming back into the picture for the next few months. I think other global Central Banks maybe nudging rates higher, but the pace of change is going to be pretty modest. So lets just say that at least at this point in time, for the next few months the global backdrop is very benign.

Looking within Asia, most central banks in our view are also on hold, may even cut rights. We think there is a strong case for further rate cuts in Indonesia and rate cuts in Thailand then you look at the two leading growth players within the region India and China, we think rights should be nudging up high in both those markets. But at this point in time it's difficult to say Central Banks that are doing anything other than put in a sort of gentle break on what's going on. So short answer is liquidity still looks good, it maybe standing to recede a little bit in India but that doesn't look particularly dangerous at this point of time.

Where is new interest coming from for India and have you heard of new money being raised or existing India specific fund picking up more money now?

You probably need to ask an India specialist on that; certainly we are still seeing signs of interest in India - expressed through BRIC funds or emerging market funds. It would appear from these sources that we are seeing a return of positive inflows into emerging markets.

Asia is doing better within that, but to us it doesn't seem that we have seen anything like a return to the levels we saw in the period from last October to April, which is an extraordinary period of liquidity.

However, we don't need that at this point in time. So yes - interest seems to be high, though doesn't seem that evident in terms of the actual foreign flows at this point in time.

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