Odds of mkts hitting new highs in 2010 low: Morgan Stanley

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It has been an intriguing start to the year to say the least. The markets had a terrific January. But just when things started to tear out, there was a correction. Post Budget 2010, the markets have regained some lost ground and have ended up 3.5% this week.

However, expert opinions still are a bit mixed as to how 2010 will end. With myriads of theories floating around on how the year may pan out, 2010 is becoming a difficult year to call.

Ruchir Sharma, Global Head - Emerging Markets, Morgan Stanley Investment Management says the odds of the Indian market hitting new highs are low. He however added that if inflation and commodity prices come off then the chances of the market hitting new highs would improve significantly.

Sharma says that this is a cyclical bull market within a structurally difficult environment. "This means that the worst is behind us, but for a new era to begin you need to clear a lot of slush out of the system before a new true era can begin. So it is sort of in between."

He is not optimistic on India's growth sustaining given the tough global environment. He said, "But I am not quite sure that we will be able to get back to 2003-2007 era where growth in emerging markets was 7%, and growth in India was close to 9%. I think that is going to take some doing given the tough global environment to get back to that regime."

Although Sharma sees some sort of cyclical rebound and India's GDP hitting 8-8.5%% in the first year of the recovery, he doesn't however see it being sustainable given the very challenging global environment. "If growth falters globally as early as the second half of 2010, it will undoubtedly have an impact as far as India is concerned. The hope is that that growth fades gently across the world and India is able to cope with it a bit better. But there is no debate that if you were to have a double dip recession or we are to see even a soft path in the global economy then India will not be able to register a growth rate of 8.5% based on just domestic dynamics," he added.

According to him, the biggest fear over the next month or two lay in the fact if global equities go up another 8-10%. He says commodities and equities both spiking up could create trouble in May, which would lead to a collapse. "It is a conceivable scenario. This is something to keep in mind that the correlation between commodities and equities cannot last for too long and if it does then you would begin to see the downside correlation as well not just the upside correlation which we have got used to over the past year or two."

Next page: A verbatim transcript of his interview on CNBC-TV18. Also watch the video.