Mumbai: Managing director and country head, Morgan Stanley, India, Narayan Ramachandran, spoke about the stock market scenario, the current rally and where it is likely to go in the coming months. Edited excerpts:
Do you think that inflection has happened?
If the question is, are we done with the lows, I suspect the answer is very plausibly yes.
What’s the central risk to the hypothesis of yours that we have a low in place?
Lessons learnt: Narayan Ramachandran says the current rally will last when everybody begins to believe that this is a brand new bull market. AFP
The most important risk is that in the West the actions that have been taken are not enough in magnitude and perhaps in the type of action. For example, some people believe that the back-end loading of the fiscal stimulus is not sufficient and it should be more front-end loaded.
How much probability would you attach to the view that we now go through a phase of recovery but maybe six months later we have another down leg?
You know we have been playing alphabetical soups, V shape, U shape, W shape. I guess the shape you are talking about is the W shape, which is that we recover and then we go back to a tailspin. I somehow think that markets will get to that point even quicker than six months from now. I think this to me represents, one, a base process and, two, also a rally relative to abysmal expectations. So it’s more that, than a severe new recovery or deterioration in the economic fundamentals. I don’t expect severe deterioration in economic fundamentals even in the West, so I don’t think the W shape. I think we sort of taper off for a while, so (it’s) dullness more than return to panic.
Dullness equals ranging markets for a while?
Absolutely. In my view May-October would be a ranging market with a trend which is possibly downward because we have probably overdone the expectation rally.
But we are not going to revisit the old flows?
Exactly. So a sort of a corridor rally or corridor trading for a while, and hopefully at that point, emerging markets in particular are able to show that even though they may not have the resilience to operate at the same rate, they have the resilience to operate at a new but still positive rate. So for example, that rate in China may not be 10% but 8%, and in India 6% rather than 9% at peak or 4.5%-5% at the bottom.
If you have seen the worst of the bear market but you are not in the bull market yet, can you look back into history and also give us your perspective of how the environment is. How long this phase of twilight between the bear and the bull markets can actually extend?
Twilight it’s actually an interesting term. Actually there is not much historical precedence of this, so most of the bear market that we have seen in our career have been fairly typical—inflation goes up, interest rates have to go up with inflation that brings the whole thing down after a little while and you respond with monetary stimulus and things work.
The expectation, of course, is the depression in the 30s and what happened to Japan and Sweden and a couple of small countries. The twilight in Japan, many would think, has not ended yet, and the twilight ended in the depression with a little cloud, if I stretch the metaphor a bit because for 10 years nothing much happened. Then you had the war.
So I think the lesson we have learnt from this sort of deflationary credit financial sector crisis is that you respond quickly, massively, decisively with monetary policy, preventing bank failures and allowing bank recaps.
But the next step is fiscal stimulus and how to get it back on track. Frankly we don’t have enough evidence and if you must go by past evidence, it is not a good sign because the war in effect produced a fiscal stimulus of the magnitude of several 10s of percent of GDP.
Now the real question is can it have a smooth flight after having lost altitude and I sort of have to believe it can.
How are the technicals loaded globally now?
I am not much of a technical guy and frankly I think technicals are not practised much outside of certain emerging markets, India being one. Frankly, one of the additional risks is whether the rally will go on or not. There’s a fair degree of scepticism that this is not a rally to participate in. This rally will last when everybody begins to believe that this is a brand new bull market. Maybe it’s (the downturn) over, maybe there is some scepticism, so maybe there is some little left on the sentiment that everybody hasn’t bought in. Maybe a month ago you would be absolutely right that a lot of money was left on the sidelines but I’m not sure that’s true today because they have been catching up relatively quickly in terms of putting that money to work and trying to catch a fair bit of this rally. But part of the logic for why we don’t revisit the lows is that at some number—lets call it 10% down from here—the residual cash and the residual risk, whatever is left in the system, begins to say is that, hey listen, I have seen a higher number in the midst of difficulty. Maybe it’s not too bad to buy at 10% lower than where we are now.
Is the Indian election a big factor or do you don’t think it’s not a game changing kind of thing?
I must be one of the few people who actually believe it doesn’t matter too much. I think in the world over democracies have figured out how to be somewhere in the middle and not cause too much pain to large countries. I must be one of the very few people who believe that the Indian election, barring a fantastically improbable outcome, will not much matter in the long run.
How do you approach the market now?
Depends on the horizon. I have been saying right from 14,000 (points of the benchmark Sensex index) down to 8,000 back to 11,000 on a three-year view that the markets would buy.
But importantly, that means you have the institutional staying power because often the decisions are made by consensus to last (out) some difficult periods. Still, it is an opportunity to participate in a lot of a long-term things that we were only speaking about 6-12 months ago as being so good and positive for a country like India.