Like to see Indian mkts cool off a little: Morgan Stanley

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With the country in the midst of earnings season, and expecting RBI's Credit Policy in a couple of days, Malcolm Wood, Equity Strategist Asia-Pac of Morgan Stanley shares his perspective on Indian markets.

 

While earnings season has been impressive according to him, he believes that liquidity is a challenge for Indian markets. He says IT companies and private banks have delivered on the earnings front.

 

He feels that RBI may nudge rates higher again, and that tightening liquidity may cause a correction in the markets. He also says that global liquidity conditions are no longer benign, and that the current liquidity conditions present a challenge for India.

 

He adds that they have been underweight on India for sometime now, and that they would like to see Indian markets cool off a little.

 

 

Excerpts from CNBC-0TV18's exclusive interview with Malcolm Wood:

 

Q: We are almost done with the third quarter earnings - do you think that they can support higher levels for the market?

A: The earnings reporting season has been pretty impressive in India. We have seen pretty strong earnings numbers particularly out of the IT companies, that are global leaders, some of the healthcare names as well as the banks and I think its been a pretty good reporting season, but as expected.

 

Q: Two days to go before a very important monetary policy announcement from RBI, but there are apprehensions led by inflation that this time around there could be some tightening and the markets are a bit apprehensive. How big a risk does that side pose to the equity markets here?

 

A: We think liquidity conditions are a challenge for the Indian market. Certainly there has been a tightening of commercial bank liquidity with loan deposit ration rising sharply and approaching levels that is going to put pressure on rates. Then when we look at the economy, a very strong economic growth, which we have been talking about, is good for earnings. But on the other hand, it does put pressure on current account; it does put pressure on inflation. So I wouldn't be surprised to the see RBI take the opportunity to nudge rates higher again.

 

Q: So what is the call on the market? I know its been trading way above your expected levels but put all that in now, earnings, your interest rate expectations and tell us what you expect to see around this Budget time which is important time for us?

A: We think that the Indian market is ahead of itself at this point of time. We wouldn't quibble with the arguments of the long-term prospects for the market, but we do think it's ahead of itself. Liquidity conditions tightening, valuations are quite high and our valuation models, which suggest Indian valuations, should be materially lower. So we would think that that combination could easily bring the market into a correction.

 

Q:  How much of a challenge do you think liquidity inflow is going to be for this market, do you expect it to be lot less than what we saw in 2006 or just more tempered?

A: India has been a fantastic recipient of global liquidity flows. Global liquidity conditions, according to our analysts, are now no longer positive. So that is going to be a challenge for India to remain attractive in a context where global money growth slows, and interest rates in the US and Europe are at relatively higher levels. So there will be more of a challenge for India.

 

Q: You made an interesting point that global liquidity conditions are no longer benign. Are you apprehensive about how the emerging markets might strike out in terms of performance then in the next one-quarter or so?

A: I am not sure about all emerging markets, but in Asia, which is where I focus, I think the liquidity conditions are differentiating themselves from the rest of the world and there are few reasons for that; one being that in most countries in Asia - India and Australia being exceptions - trade surpluses have been very strong, since lots of liquidity is coming in from that angle. Then you also have benefits of ongoing low interest rates and on top of that market expectations of ongoing appreciation in Asian currencies. That combination is leading to a lot of liquidity building up in some core Asian markets like Hong Kong and Singapore and we have seen strong performance out of those markets.