The Hindu Business Line : `Like to see Indian markets cool off a little'

With the country in the midst of earnings season, and expecting the RBI's Credit Policy in a couple of days, Mr Malcolm Wood, Equity Strategist Asia-Pac of Morgan Stanley, shares his perspective on Indian markets.

Excerpts from CNBC-0TV18's exclusive interview with Malcolm Wood:

We are almost done with the third quarter earnings - do you think that they can support higher levels for the market?

The earnings reporting season has been pretty impressive in India. We have seen pretty strong earnings numbers particularly out of the IT companies, that are global leaders, some of the healthcare names as well as the banks and I think its been a pretty good reporting season, but as expected.

Two days to go before a very important monetary policy announcement from the RBI, but there are apprehensions led by inflation that this time around there could be some tightening and the markets are a bit apprehensive. How big a risk does that side pose to the equity markets here?

We think liquidity conditions are a challenge for the Indian market. Certainly there has been a tightening of commercial bank liquidity with loan deposit ratio rising sharply and approaching levels that is going to put pressure on rates. Then when we look at the economy, a very strong economic growth, which we have been talking about, is good for earnings. But on the other hand, it does put pressure on current account; it does put pressure on inflation. So I wouldn't be surprised to see the RBI take the opportunity to nudge rates higher again.

So what is the call on the market?

We think that the Indian market is ahead of itself at this point of time. We wouldn't quibble with the arguments of the long-term prospects for the market, but we do think it's ahead of itself. Liquidity conditions tightening, valuations are quite high and our valuation models, which suggest Indian valuations, should be materially lower. So we would think that the combination could easily bring the market into a correction.

How much of a challenge do you think liquidity inflow is going to be for this market, do you expect it to be lot less than what we saw in 2006 or just more tempered?

India has been a fantastic recipient of global liquidity flows. Global liquidity conditions, according to our analysts, are now no longer positive. So that is going to be a challenge for India to remain attractive in a context where global money growth slows, and interest rates in the US and Europe are at relatively higher levels. So there will be more of a challenge for India.

You made an interesting point that global liquidity conditions are no longer benign. Are you apprehensive about how the emerging markets might strike out in terms of performance then in the next one-quarter or so?

I am not sure about all emerging markets, but in Asia, which is where I focus, I think the liquidity conditions are differentiating themselves from the rest of the world and there are few reasons for that; one being that in most countries in Asia — India and Australia being exceptions — trade surpluses have been very strong, since lots of liquidity is coming in from that angle. Then you also have benefits of ongoing low interest rates and on top of that market expectations of ongoing appreciation in Asian currencies. That combination is leading to a lot of liquidity building up in some core Asian markets such as Hong Kong and Singapore and we have seen strong performance out of those markets.

We have a Union Budget as well in few weeks. Do you expect anything significant to come out by way of policy and do you watch that in terms of a cue for the market?

I think it would be very positive for India if we were to see some structural changes on the policy front. From our perspective, we would like to see India accelerate its privatisation programme and that would be a good signal to global markets and attract ongoing liquidity flows to India.

We feel that improvement of tax-collection regime in India could only mean positive from a long-term perspective and improving the fiscal position of the country, but I think that as things stand, at some point in time, fiscal deficits of the size that India has been running year-in and year-out are going to come home and hurt the economy and the markets.

What is your current rating on India and if it were indeed equal or underweight, what would it take for you to review that position?

We have been underweight for sometime, and for us to change our minds we would like to see the RBI raise rates. We would like to see the market come down on the back of that and for things to look a lot more sustainable in India from the medium term. The longer-term growth potential of the economy is very positive. So we would just like to see things cool off a little.

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