The Hindu Business Line : Wait for Indian market to cool: Morgan Stanley

We would like to see the RBI raise rates, the market come down and things to look more sustainable in India from the medium term. — MALCOLM WOOD, EQUITY STRATEGIST, ASIA-PAC, MORGAN STANLEY

With the country at the end of the earnings season, Malcolm Wood, Equity Strategist Asia-Pac of Morgan Stanley, shares his perspective on the Indian markets. While the earnings season has been impressive, according to him, he believes that liquidity is a challenge for Indian markets. He feels the RBI may nudge rates higher again, and that tightening liquidity may cause a correction in the markets. He also says global liquidity conditions are no longer benign, and the current conditions are a challenge for India. He adds that Morgan Stanley has been underweight on India for some time now, and would like to see Indian markets cool off a little.

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

We are almost done with the third-quarter earnings; do you think 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 it's been a pretty good reporting season, but as expected.

So what is the your on the market? And what you expect to see around this Budget time.

We think 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 models, suggest Indian valuations should be materially lower. So we would think that that 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 a 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 higher levels.

You made an interesting point that global liquidity conditions are no longer benign. Are you apprehensive about how the emerging markets might strike out over the next 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 a 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 the 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 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 the tax-collection regime in India could only mean a positive from the long-term perspective and improving the country's fiscal position, 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.

Do you see the risk of withdrawal of liquidity from any of these markets because we saw bit of that happening in the crude market, which worried a lot of investors in the emerging markets in this region. Do you see the possibility of anything like that happening?

I think you have to recognise that fast money investors, the hedge fund investors etc., are far more prominent in our markets today than they have been for years. So, from that perspective you could see withdrawal of liquidity. But when we look at it from an Asian perspective, looking pan-Asia again, we think earnings growth will be reasonably solid, valuations have come up but it's still okay and liquidity conditions are quite positive.

So we think these combinations should mean that Asian markets are okay. India, by contrast, we think will be more challenged on the liquidity front and does not have the valuations safety that some other markets in Asia have. So, if we were to see liquidity from a foreign investor perspective change at the margin, then India would be vulnerable to that, in our view.

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 some time, 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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