Tech, telecom stocks stand out: Morgan Stanley

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Narayan Ramachandran, MD of Morgan Stanley attributes the recent market crash to global concerns alone. "It was nothing much to do with the Budget at all," he said.

He discusses the effects of these global concerns, the Chinese markets on the Indian markets and advises on what should be picked up or avoided there at this point in time.

Excerpts from CNBC-TV18's exclusive interview with Narayan Ramchandran:

Q: Is what has happened to the markets really due to global concerns or concerns of the Budget?

A: I think it's really global concerns, it was nothing much to do with the Budget at all. It is a combination of China and the US and the rest of the world. China was simply the trigger that pushed an overbought situation around the world into negative territory, but the fears of slowdown in the US has at least an equal part to play if not more. Evidence for that is the strong rally in long bonds around the world, but more specifically in the ten-year bonds in the US.

The Chinese and the Indian have a slightly different problem that is arresting what they think is asset inflation. So that's a different problem from the slowdown that is going on in the housing market in the US and the moves from the Chinese both related, both to the monetary tightening policy as well as prudential tightening as seen by things like action against securities firms etc. sort of tipped it over last week.

Q: You have been looking at emerging markets for a long time now. When something like this happens globally, what kind of hurt do emerging markets feel?

A: In the very short-term, there is obviously pain. But fundamentally, there's no problem. There is a little problem here and there about inflation in India and China in pockets, but in contrast to that, other areas have other problems of low growth and potentially disinflation.

So the key is to stay the course and all of us owe it to investors both institutional and retail that double-digit returns over a  year is fantastic, even it is 11-12-13% nominal returns. If you are able to compound that overtime, then that is great.

But we have got a little spoilt with numbers in the 30's and 40's and sometimes even triple-digit for certain countries and stocks. But if you can compound your money at 12% for seven, eight, nine years, then you are doing very well.

I think given the demographic profile of India, given the extraordinary low penetration of organized financial product; the question is not whether to sell at all, the question is how do you steadily add, particularly add if one is young person whose is consuming it away in the meantime.

Q: The effect of China on Yen carry trade; what effect will that have on liquidity flows into markets?

A:: I agree with Mr Kumar that this doesn't matter too much form an Indian point of view. Firstly, the capital account is dominated not so much by secondary market flows as much as it is from the flows form the Diaspora through remittances. So that holds a very good anchor in the Indian capital account and the yen carry trade doesn't effect that too much obviously disastrous growth scenario might, but it is not as cyclically sensitive as most people make it out to be.

I think the situation here is one of a pause is what was a straight upward ascent from the middle of last June and people should begin to expect that. Now I am a little less confident that the equity markets can generate 20% type returns in India and probably it's down below that close to the 15% range because PEs are not as low as they could be.

So even if you get a little hiccup on PE, then the earnings growth is erased by the PE contraction, but in a long term sense its very positive. I agree that this hullabaloo about inflation will subside in the months to come. It won't go away completely, it will sort of occasionally threatening 5.5-6%, but from where it is today already, we saw the WPI numbers today, week-on-week they were quite negative and therefore positive but that's just a week's number. So I think some of these spring uncertainty will go away from us.

Q: What's looking good to you and what's looking avoidable?

A:: We are into the cycle and the temptation is constantly to dip into smallcaps. But one of the things I have learned over the years is try to refrain from that temptation, except when it is completely down and out and at the bottom of the cycle.

So in the middle of the cycle, I think the key operative words would be find stocks that have earnings visibility, earnings stability and sort of a business model that can carry them not across only this cycle, but across futures cycle as well. That's where companies like telecom, technology stand out.

I actually think that the cement sector, particularly after the correction, looks very interesting because that was the one of adjustments to a pretty ham handed changed in regulation. I think messing directly with the market like that was not a sensible thing to do and I actually think that cement stock prices looks very interesting given the correction from there.