Morgan Stanley India Equities Research Seeking Value? Look Elsewhere! Our bear case: We still argue for greater upside than downside for the market. Our bear case calls for 18% downside to the BSE Sensex over the next six months. The base case is that we are heading higher and we rate the probability of our bull case (25%) higher than our bear case (10%).
Key Debate : India seems to be in a dream run, at least relative to the world. Unlike what we would have expected, the India market has been unscathed by the global turmoil since April , first in the form of slowdown fears in China, then European sovereign issues and, most recently, a double-dip scare. Is India likely to be the good stock that falls in a bad market to establish a global market trough?
Market View: If we go by our latest investor survey, investors believe that the biggest concerns for India are, in order: sovereign defaults, inflation, valuations, and global growth (see chart on page 6).
Our View: We think that the key concerns for India can be put into four buckets – negative real rates, global spillovers, negative growth surprises, and equity market performance. These concerns are strongly intertwined in that they feed off each other. Here are our debates:
a) Europe problems are resolved; global growth recovers sharply: The RBI has calibrated its rate moves in the context of a fragile world. The consequent negative real rates also reflect the bank's view that India's growth recovery has been driven by fiscal stimulus. Negative real rates have fed a widening current account (a large fiscal deficit has not helped), provided some tailwind to inflation, and possibly caused deposit growth to slow down, tightening banking sector liquidity. If the world recovers smartly, the RBI could fall behind the curve, leading to a larger inflation problem. While absolute performance may stay put, India's relative performance will likely suffer under this scenario.
b) The world double dips: If we see a severe global growth slowdown, India's domestic policy position may just turn out to be very precise. With its current account deficit at 3% of GDP largely funded by portfolio flows, an acute risk aversion event such as a double dip could cause a funding gap for India and slow India's growth, eventually causing India to give up relative and absolute performance. Interestingly, so far, events around the world have not damaged Indian equities, so it seems any risk-aversion event will have to be quite dramatic.
c) Growth slowdown: India's growth rate will likely slow down due a high base effect in the coming months – the second order of growth rate is likely turning down even though overall growth remains very strong . The market appears to be pricing this in (see chart on page 5). The above issues (i.e., double dip and domestic inflation scare) are sources of a growth setback and could derail the market's relative performance.
d) Other Issues – Monsoons, Expectations from the Government: We worry less about the monsoons given the low contribution of agriculture to India's GDP. From a sentiment standpoint though, bad monsoons could hurt the market in the short run. Thus far, the rains seem to be behind the long-range average but are catching up. The market is betting on fiscal consolidation given the string of reforms, strong growth, and 3G collections – hence the surprise is now on the downside. Investors are beginning to expect stronger execution on reforms from the government and, hence, the scope for disappointment has risen.
e) Market is at fair value and India's performance has been very strong: On its own, valuations are unlikely to derail market performance in the short run. However, when combined with one of the above, and the fact that India has outperformed the world (and this attracts a lot of attention now), could create trouble for Indian equities. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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