Mumbai: US investment banker Morgan Stanley has upgraded India to “overweight” after it proved to be more resilient than many other countries. Jonathan Garner, chief Asian and emerging markets equity strategist, Sanjay Shah, managing director and head, institutional sales, and Ridham Desai, managing director and head, equities, said in an interview that they are seeing increasing flows from their global clients into the Indian market. Edited excerpts:
Positive dynamics: Morgan Stanley’s Ridham Desai (left), head, equities; Jonathan Garner, chief equity strategist, Asia and emerging markets.
What’s the sense you get from investors who look at India?
Garner: There is growing enthusiasm towards Asian equities and towards Indian equities. We have upgraded India to “overweight” along with other markets in the region and it is the key outperformer this year... You have very positive political dynamics...so we are seeing increasing flows from our global clients into the Indian market.
Sanjay, is the evidence on the ground suggesting what Jonathan is saying?
Shah: Well, yes. I think the swing factor has been the election outcome. Even prior to the election outcome, across the region, we were seeing an acceleration in (investment) flows as Jonathan mentioned, but people were hesitant to invest in India not because they were worried about the long-term prospect, but just because of the uncertainty of the election outcome. Now that is behind us, and the outcome has been much more pleasant from global investors’ perspective than anticipated. So we are seeing an increased amount of activity happening in terms of flows, in terms of investors coming through, and it is also evident from the primary market pipeline, which is accelerating. More and more corporates are coming through and raising money. So all these are good signs from an economic perspective as well as from the perspective of investors investing in India.
Is this interest that you speak about, Sanjay, is it largely from the hedge funds who might be just correcting their net position in India, or do you see a lot of interest from the long-only funds who are probably overweighting India after a long time?
Shah: Well, I think the hedge funds have largely flattened out their books, more or less, prior to the election results and in some ways, there was some kind of inertia in terms of activity.
What has happened post the election results is that many of the large, global, long-only funds who were waiting for the results to come out and get some more clarity have decided to go overweight India. Some are in the process of doing so and some have already started doing so and that is where the incremental amount of interest is coming from, the large, long-only funds who want to take a strategic position in India from a longer-term perspective. The hedge funds are active and the global hedge funds have been increasing their exposure to India post the election results, but it is not as much hedging as there is more fresh interest built into Indian equities.
Ridham, do you think the rally has got a very large technical component, this cash getting deployed, or do you think it is fundamentally led, the money is only chasing fundamentals and it’s not just a case of liquidity-driven momentum which is building up?
Desai: Well, actually Udayan, the liquidity was always there from the sidelines.
I think we have had a key fundamental event in the middle of May in form of the election. ...For the past two years or two-and-a-half years, India was largely driven by what was around it rather than what was happening inside it and that was exhibited in India’s high beta status, huge capital flows coming in because there was exuberance around the world. For the first time, I think, in two or three years, ...India can come in, establish its own fundamentals...
Ridham, this March, we had a closing low on the Sensex at 8,000. Within 12 months of that, March next year, could we even be knocking on the door of the old highs, fuelled by liquidity?
Desai: Yes, well, our bull case does call for a significant upside to the market and that is predicated on policy response from the government if it exceeds current expectations. So I think the market expects the government to do something on infrastructure, something on fiscal consolidations, something on banking and insurances, retail and maybe a little on FDI (foreign direct investment), and if the government surprises us by handing out several road contracts over the next few weeks, comes out with a budget which has tax cuts in it, which removes the surcharge on corporate tax, removes the FBT (fringe benefits tax), which cuts taxes across the board, revives consumption growth, which raises an infrastructure fund to undertake some large-scale infrastructure activity, then who knows...our growth estimates could be severely underestimating the prospects of India and the market could well come to new highs in 2010. ...As it is our bull case for this year is somewhere around 19,500 (points), which is not very far away from where we were at the peak of 2008.