Mumbai: Global financial services firm Morgan Stanley is overweight on emerging markets such as India and China, its chief Asian and emerging market equity strategist Jonathan Garner said in an interview. On what sectors to buy in India, Garner said investors should stay away from consumer staples and low-beta sectors and instead buy high-beta ones. Beta is a measure of a stock’s volatility in relation to the market as a whole, and high-beta stocks tend to be more volatile but with a potential to deliver better returns. Edited excerpts:
Equity market: Morgan Stanley’s Jonathan Garner.
China has become the top talking point in our market for the last few sessions; how are you reading cues from that part of the world?
The underlying picture is one of global economic recovery, and we suspect that in Asia and emerging markets, corporate earnings are going through the trough of the cycle right now. So the 2010 outlook strategically is very good. The only issue is having come a long way in a short period of time...people begin to get concerned about sustainability of recovery and begin to look ahead for a tightening cycle.
For China itself though, as a market, there has been a fairly deep correction these past few weeks. Do you sense that market itself might struggle for a bit longer?
We are still overweight Chinese equities as we have been since late last year.
Like the rest of the emerging markets, they have corrected the extreme mispricing that existed since then.
So we are back in both Chinese equities and global emerging equities to slightly above long on average valuation levels. We think that any idea about what is going to be a meaningful tightening in Chinese monetary policy soon is wrong and we expect it to be mid-2010 before we get any meaningful reimposition of (tighter policy)... So we suspect this correction will run its course relatively soon in China.
What about India? Are emerging market investors now leaning more towards India compared with China, given the kind of volatility you are seeing in that market?
We like the Indian markets as well. We are overweight Indian equities. There has been a poor monsoon season and we are factoring that into our GDP (gross domestic product) forecast, but the industrial production and corporate earnings side of the economy are very strong, in fact beating expectations on corporate earnings. Then we have measures that are coming forward on the fiscal side that we find quite encouraging, particularly the corporate tax reduction that is being muted in the simplification of the tax code more generally, which I think will help investor sentiment towards India. So we are pretty comfortable in retaining an overweight on India here.
There is a degree of discomfort about the valuations in India, particularly for some of the heavyweights or Nifty stocks. Do you go with that?
We have the market trading at about 15 times 2010 price-earnings (multiples). That’s about a 20% premium to global emerging equity markets. It has been an expensive market relative to the historical peaks of the Indian market. However, no one is cheap as it was six-nine months ago. But with corporate earnings surprising on the upside, we think that the multiple is okay here and we think we can get further higher gains for the Indian markets as we have for the rest of the emerging markets.
What kind of themes would you back and what would get your investors to buy here?
We recommend staying away from consumer staples and some of the lower-beta areas of the market.
Both Riddham Desai, our India strategist, and myself have done that in the respective focuses that we have run, and on our side we have increased the exposure, particularly to infrastructure and construction, and the road-building programme is an extremely interesting one to play, and the property sectors as well, which are high-beta sectors to have exposure to.
Give us a quick word on whether you sense that money interest is still high in markets like India.
Emerging equity markets in aggregate have had $40 billion (around Rs2 trillion) of foreign inflows, in terms of foreign mutual funds and purchasing stocks in the EM (emerging market) world.
What is interesting this summer is rather than abating or going into reverse, they have remained at reasonably robust levels, which I think is testament to the last and first nature of the global economic recovery this time. This has been a very unusual global economic recovery in the sense that Asia and EM led the recovery rather than the US. So retail investors globally are responding to that by abating their holdings in Asia and EMs. That is very encouraging. It’s reversal of the outflows that we saw last year and we think it’s reasonably sustainable.