Be cautious, eco vulnerable to double dip: Morgan Stanley

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Q: If that's your view on the economy though where does that leaves equity markets for this year? How high would you rate the chances that towards the second half markets can actually recover the gains we saw in 2009 and deliver return as stellar?

A: Look at the US stock market, the Asian stock market, the European stock market, and the Indian stock market, price themselves for a standard, classic, V-shaped recovery with almost no possibility of a setback. I think the big surprise for 2010 will be a growth scare, I don't know whether we will have a contraction or a double dip, but I think to the extend the markets having ignored this possibility it is going go be a much tougher year for world equity markets in 2010 than it was in the final months of 2009.

Q: Where does all that leave the commodity universe? Up until now things have more or less moves in tandem with the emerging market space and commodities. What do you expect to see in that asset class?

A: Commodities have performed very well and there are expectations of open-ended vigorous growth in global economic activities. If I am right, world economic growth will recover, but very anemically and it will be much weaker than the commodity markets need to sustain high prices or I think we have been at the upper range of commodity prices in late '09. I think will trade in a narrow range probably somewhere below we are right now.

Q: What is your stance on the kind of tightening noises that you have heard from China over the last month or so because that had some kind of a denting impact on the commodities market?

A: China turned into a spectacular growth in 2009. But it was growth that was manufactured by the stimulus package where investment spending with a kind of 70% of the GDP increase last year and that was fueled by a record open ended burst of bank lending. China sensed some great signals that bank lending needs to slow otherwise there will be aversion deterioration to long quality and that investment can be expected to slow given the likely shortfall of bank lending as well. So Chinese economic growth is certainly going to be facing a significantly different headwind in 2010 than they did in 2009 with the important implications for China are Asia, Asian trading partners especially Eastern Asia.

Q: We have had some tightening signals from the Reserve Bank of India (RBI). How have you read the cash reserve ratio (CRR) hike? Do you think we are embarking on a long cycle of tightening or not quite?

A: RBI has been in the forefront of central banks around the world in easy monetary policy preemptively to avoid and tamper the risk of financial instability. This was certainly true in the period leading up to the bursting of a sub-prime bubble. I expect the RBI to remain vigilant to the possibility of financial instability, inflation risk and the like. Right now the Indian economy is in pretty good shape. However, there should be worries on the developments in either inflation instability front. I would expect the RBI to move quickly.

Q: At your last India interaction though you made the point that you had now decided on a huge shift after many years where you favoured India versus China. What would you advice then as that India versus China call right now?

A: I think you can be very constructive about India and China. These two different countries, you don't want to paint them with the same brush and I don't think you want to set up a horse race. China has opened up such an enormous gap in terms of capital income relatively India over the past in 19-20 years. So it is inconceivable to me that India can close the gap. I think the story for India is a very compelling one over the next several years.

Micro in terms of companies, labour force and financial institutions remains very positive. Macro in terms of savings foreign direct investment in infrastructure has improved a lot in recent years. The political constraints certainly look a lot more worrisome in the aftermath of the elections of last May. So I am very encouraged by prospects in India. Most of the encouragement by the possibility that China is going to move ahead is with a different approach to economic growth over the next few years. We have seen focusing more on consumer growth dynamics and that is equally good news for China.

Q: To labour the point on the currency front for a bit though, there has been an extremely strong recovery for the dollar index, its now trading at about 80. What are the chances that retraces to where it started from the 73-74 mark. What kind of collateral damage would that have for our own currency, the rupee?

A: I do not want to get into a view on specific currencies and the region. I have learnt that whenever I say anything about any currency somebody whether it is you or someone else comes back and tries to embarrass me about it later. In my life making forecasts is embarrassing enough and that's stumbling into the currency trap.