Mumbai: In order to sustain the current rally in the stock markets, the new United Progressive Alliance government needs to deliver on the reforms front, says Narayan Ramachandran, managing director and country head of Morgan Stanley India. In an interview, Ramachandran said the markets have discounted large expectations from the government. Edited excerpts:
What are your key takeaways from the Morgan Stanley India conference?
We did have a very good conference, partly because of the timing and partly because we had a very diverse set of investors from across the world and about 50-plus corporates from India.
I think the key takeaway was that this rally was really building on three legs—the global economy improving on the margins; a sort of enthusiasm coming from the prospect of government reforms after the elections in India, particularly on the rural consumption side; and the third, that risk preference had improved materially around the world. We have already had some foreign institutional investor interest, and significant at that, for the last two months or so.
From what you gauged from India-dedicated funds, emerging market funds or even the hedge funds who attended, could there be more coming our way?
Market mechanics: Morgan Stanley India’s Narayan Ramachandran says more people will be coming into the market in the very short term.
I think, there is still the notion of the market climbing the wall of worry. There are still a few sceptics out there. There is a sense of several people feeling left out of this rally. So, I think, in the very short term, there is more action to be had in terms of more people coming into the market. That is local, international in itself is broken down into dedicated India and dedicated emerging markets as well as opportunistic managers in both, and players like hedge funds.
Did you hear any murmur of dissent about the valuation levels or have we reached that point where money is burning a hole in the pockets and people are looking at 2011 and 2012 earnings to justify where valuations have reached?
If you go back to the earlier comment I made that the three legs upon which this is built, a couple of them at least are a bit shaky. So, I think, there certainly was among the nuanced conversations that we have had throughout the conference an awareness. For example, on the government reform front, the market seems to have made a little down payment towards that prospect, and therefore, it would be well up to the government to actually deliver on that down payment, else the market would be disappointed.
On the global economic front, there was a widespread conversation that while there has been an improvement in the margins, this is not a permanent new level of activity. It was simply a return to slightly better activity than we had last year, and therefore, caution was warranted from that front itself. The third leg—risk preference—is a function of these two and it would itself change if there was a tempering of this activity.
So, there was a little conversation and awareness that while the rally was good and came from a change in the margin, in order for it to be sustained, there had to be an action taken in India, for example, in the government.
On the corporate side, people were aware that many companies were using this opportunity as a way to restructure their balance sheets, which is all fine for the first wave of it. But beyond that, they really owe it to investors to show how they are going to cater to demand in terms of new products and things, while keeping margins at the levels that investors want.
Were the investors at the conference happy that stressed balance sheets were getting restructured or addressed? Or did they say that companies will raise capital opportunistically, which may lead to dilution of equity?
That’s the bane of our business—when you can raise the capital you may not necessarily need it, and when you absolutely need it, it’s a rough turf. So, this is a fine balance kind of issue. People were aware of it, which itself makes it less of a problem than being totally blind to it the way we were in 2007.
But beyond a point, people are conscious that it does lead to all of the effects that you were speaking about—dilution, simply fixing balance sheets, not focusing on income statements and so on.
But it is still early days and we have a little bit to go on both the market’s willingness to have more companies raise capital as well as markets themselves. So in that sense, maybe we’re speaking in midway rather than at the tail.