Morgan Stanley eyes select small caps

Excerpts from Bazaar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

CEO of Morgan Stanley Investment Managers, Narayan Ramachandran believes that emerging markets are on a good wicket for the next 2-3 years.

According to him, the emerging market cycle faces risk of inflation and high interest rates. He expects India to attract money in the near-term on softness in US and Japanese markets.

He informs that Morgan Stanley may look at only select small caps in India. Morgan Stanley is underweight on financial sector since it is not very attractive.

But he informs that they have invested in some Indian banks. He opines that FMCG are not very attractive.

Excerpts of CNBC-TV18's exclusive interview with Narayan Ramachandran:

Q: From the real estate sector, we have had a big listing from Parsvnath. Where do you stand on how the market is valuing these realty plays now?

A: We like growth but we don't like too much hype and I would definitely put the real estate stocks in the hyped category at the moment. So unfortunately, in the land grab, that's going on in India at the moment, we are not much part of that, as we speak.

Q: What makes you skeptical - the whole valuation theory on land banks and that everything can continue to shine ever after, which seems to be the assumption seems today or are you generally not very bullish on real estate as a theme?

A: We are very bullish on the long-term India story and real estate and real estate value added services are very much part of that. It's just that when the sun is shining so strong and everybody knows it and they expect it to shine even brighter than what would be considered quite bright, then we rather look elsewhere where it looks like the clouds are gathering. But in effect, there is no other problem. So I don't think there is anything fundamentally wrong, it's just that expectations have got ahead of themselves in our view.

Q: How are you reading the emerging market story right now because so far, it has been pretty good in the last couple of months. Do you see any clouds gathering at all from the noises emanating from the US or do you think we still remain in a fairly good patch for emerging markets generally?

A: I think we remain on a very good wicket for emerging markets in the next two-three quarters. There are two ways that markets can get really worried. One is if demand collapses and the other is if inflation gallops and interest rates have to rise.

I just don't see the first happening even though temporarily there is a little bit of worry that demand in the US and to a lesser extent in Japan is soft. I think that's a temporary patch, its actually a bit of a technicality because production is shifting down a tad to adjust for moderating demand.

So it is typically part of what you get at this phase in the cycle, which is a little inventory adjustment by the production making a bigger adjustment than demand. While demand is coming down in the world, it's just moderating, it is not collapsing off a cliff.

So I think the emerging market cycle will eventually be derailed only by inflation and consequent interest rate hikes and we are six-eight quarters away from that. So I see any technical decline in markets more as an opportunity to buy rather than a position for some sort of catastrophe at this moment.

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