Valuation premium to reduce post budget: Morgan Stanley

Q: Will we get away with dullness or is the possibility of the sharp dullness opening up again. We get ambling around these levels is fine, but if another 20-25% downside opens up in the US markets, then we will probably take it in as well?

A: A lot depends on policy. Even though many people have said that this is not quite same as them the pattern is begging to be very similar, there was a little spike in 1931 after the policy eased up. We have to be very careful that the West doesn't start tightening too fast too soon because then that could set everything back. So, the role of policy is extremely important in terms of how this thing evolves. Going back to the old alphabet soup, is it sort of a U-shaped or a W-shaped recovery will be back in focus. But policy plays a very important role. I think Ben Bernanke from the US point of view is a great student of the depression. He realizes that he needs to keep policy simulative sufficiently to ensure a baseline of demand. Asia can potentially decouple coming back to the phrase that is doing the rounds in the last year-and-a-half. Of its own accord, without balancing difficulties, Asia with reasonable local demand can hang in there. So, hang in there for the rest of the world and for the emerging markets, but I am afraid dullness is on the cards.

Q: In terms of earnings damage, do you reckon we have seen the worst out there?

A: Yes. March 9 is probably a global low in stock markets. Markets as we all know slightly leads the earnings trough, so perhaps we are seeing the earnings trough around the world. That doesn't mean we are going to climb fast and furiously. It just means that we have a trough. I suspect we are reaching that as we speak. But if the policy particularly in G3 gets tight quickly, I am afraid there is a possibility that we can go back down again.

Q: Just one word on the fears that came to the fore yesterday of interest rates spiking in India, bond yield going past 7%, people once again talking about yields going up, and even inflation coming back at the end of they year? Are those legitimate concerns?

A: The inflation concern is not really a valid one at this moment. Eventually it will become, but I don't think in the next year or so, inflation is really a concern against the backdrop of the world that is quite dull, demand deficient, and oversupplied. I am not too worried about inflation coming back, but I am a little worried on the Indian context about government spending or government borrowing crowding out private sector borrowing.

Without a corporate bond market and without any real source of long-term lending with a particular focus on infrastructure, we are a little short if the government borrows a marginal rupee from the markets. I think there is this fear of crowding out of private investment particularly private long-term credit in favour of infrastructure. That's a serious worry that we will have to do.

I was not too happy with what came out yesterday because we have seemed to put the cart in front of the horse. It appears that to get growth to cushion, we could do reform. I think we want to do the opposite that we get reformed so that we get growth on the future.