Weak data to push Nifty into 4500-5000 band: Morgan Stanley

According to Gaurav Doshi of Morgan Stanley Private Wealth, India is currently dealing with three major domestic issues – currency, liquidity and policy. Since global cues remain uncertain, he says all eyes are going to be on the domestic front.

“I think the global situation is pretty much assumed to be a muddle through situation for right now, and therefore all eyes are on the domestic front as to what we get from the government in terms of policy initiatives and what sort of progress we see on that front,” he said in an interview to CNBC-TV18. He goes on to say that the market is holding high hopes from cues going forward, and therefore there is a chance that we experience some disappointment as we move into earnings season. If such a scenario materialises, Morgan Stanley expects the market to fins strong support at 5000, 4900 and 4800. However, Doshi says the potential negative newsflow could make it difficult for the Nifty to even hold on to 4500. “If you get some sort of major crisis out of Europe, if we see no progress, no outcome or no feasible roadmap post this EU Summit, if we see actually nothing in terms of the expectations that we have from our Indian government in terms of policy and reform, then I don’t see why the market will continue to hover and trade above 4800 mark,” he explained. Therefore, he sees a situation where the market moves into 4500-5000 band. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos. Q: Are we going to be stuck in a range, grinding here for longer, or are you expecting a risk-on phase globally? A: I think globally there seems to be a lot of downside risk versus what the markets are expecting, even whether it is from the EU Summit or whether it is from US data. Having said that, I don’t think a muddle through gloomy global environment is that bad a situation for India provided we get a lot of our domestic internals right. I think India today is grappling with a lot of domestic issues, currency, liquidity and policy being the three major things, and I think our market is going to be primarily influenced by these factors at least in the immediate near-term. I think the global situation is pretty much assumed to be a muddle through situation for right now, and therefore all eyes are on the domestic front as to what we get from the government in terms of policy initiatives and what sort of progress we see on that front. Q: What are you working with in the months to come - for the market to remain rangebound in this 4900-5100 zone, or do you expect a sharp selloff come July? A: Last time when I was around I talked about two ranges and I think those two ranges continue to hold. Put it simply, 5000-5600 seems to be the broader upper range with a hurdle at above 5250. We have got domestic and global triggers, and if both play out, which seem unlikely, then there is likelihood we move towards that 5600 front. If we get one of the two cylinders firing then we have 5200-5250 range. But unfortunately it seems like the market is expecting too much and there is room for disappointment, especially given that we are moving into earnings. So a break under 5000 would put us back into the 4500-5000 range. Even though we believe that 5000, 4900 and 4800 will prove to be meaningful support levels, unfortunately our view is that the sort of potential negative news flow could take the market down, either globally or locally, and it would make it hard for the market to then hold onto the 4800 support. If you get some sort of major crisis out of Europe, if we see no progress, no outcome or no feasible roadmap post this EU Summit, if we see actually nothing in terms of the expectations that we have from our Indian government in terms of policy and reform, then I don’t see why the market will continue to hover and trade above 4800 mark. Read on for Morgan Stanley's views on individual sectors.. _PAGEBREAK_ With the RBI making it clear that attracting long-term capital FDI flows into the country is the solution to the currency crisis, and given that’s not something that can be remedied overnight, there is a very realistic situation that the market moves into the 4500-5000 band, depending on obviously how severe the negativity is we move lower into that band. But one must acknowledge that 4900, 4800 and 5000 will prove to be formidable support levels but in the face of really bad news I don’t think they will hold. Q: When we spoke a couple of weeks back you were quite concerned about economic data coming out from the US and that has been consistently poor. How have you read it and is it enough you think for a Quantitative Easing (QE) to come soon enough? A: We were disappointed by the FOMC (Federal Open Market Committee) announcement last week. We were expecting QE3 not an extension of operation twist. The problem for the Fed's point of view is we think it’s the presidential elections approach, it’s more likely to sit on its hands. In other words, the data would have to get either exceptionally bad or the risks coming from Europe very intense to get the Fed to move. As things stand now we think it’s quite likely the Fed will do nothing until after the presidential elections in November. So you really now have a 4-5 month hiatus where the Fed will be on the sidelines. So that’s I think a small headwind for markets. I never really believed that QE3 would be that helpful in any case, but what it will mean is that markets are left to focus on the growth slowdown in the US firstly. Secondly, the approaching fiscal cliff, which is the massive tightening of fiscal policy that’s programmed to start in early 2013. Enormous downside risk to corporate earnings in US, where I think, the sell side consensus is ludicrously optimistic. We are expecting a major miss on US corporate earnings over the next 12-18 months. Q: What according to you remains the big risk over the next two quarters for equity markets? Is it the fear of a global recession or is it a breakdown in news flow from Eurozone? A: I would just say that equities face a raft of risks. We have the global growth slowdown,  prospect of very significant earnings declines. We have the fiscal cliff in the US, eurozone stress. Also we have the concerns about growth in the two largest EM economies, India and China. So there really is a long list of risks now facing equity investors. I think that is what is skewing the outlook to the downside, particularly against the backdrop where the policy reaction has been relatively disappointing. Lots of risks, not much policy response, it means to me equities are much likely to trend down, not up over the next quarter or two. _PAGEBREAK_ Q: How important are these liquidity announcements from the central banks. If they were not to happen would you expect to see significant risk off, sharp outflows from markets because that hasn’t quite played out up until now? A: I think we are still in a deleveraging phase and that means money is coming out of everything. That’s the problem and its quite different from the two decades that started from mid 80s to 2008 when people were leveraging up. We had fresh money coming into every asset class as people funded their asset price purchases by increasing their debt. Now we are seeing a reverse of that process with money seeping out of risky asset markets everywhere. That’s why we are seeing the massive de-rating in risk asset prices and general weakness. Hence, we are not convinced that easing of central banks particularly in the developed world is that important for risky assets, because no one wants to borrow. Central banks are pushing on a string and that makes it a very different environment. So, the de-rating continues, central bank actions can get short lived rallies as we saw after QE2, but my view if even if we had got QE3 last week, any QE3 rally would have lasted a matter of hours or days, not weeks or months, monetary policy has lost its potency. _PAGEBREAK_ Q: Tactically then what do you do with a high-beta space like infrastructure where there are rich pickings to be had from this series? A: I think infrastructure is a good trade for a trader; you are getting to see a lot of action over there in terms of price action. Just using Larsen as an example gives you a feel of how the entire basket is moving. But again with infrastructure I think the market is building in two things. One is some sort of development on the policy front from the government and number two is incremental access to finance for these infrastructure companies as the environment improves from the banking system. If you ask me, realistically speaking both these scenarios are a little while away. We will need to first see the government deliver before a real sustainable rally in infra begins. So right now infra seems to be a good trading space to be in. Given the sort of global risks and the lack of policy that could play out, we may not have this infrastructure rally sustain and therefore you don’t want to be chasing the infra rallies, wait for the bad day. But no doubt, if and when you are to turn positive on this market from here, it will be on triggers that we are getting our fiscal situation in order and we are getting movement from the government on policy. If that is the scenario plays out, which is to me the only scenario the market can go up in, then I would definitely think infra is an sector that you want to be in. Q: What do you see in terms of FII interest in the market? The level of activity, buy or sell, has diminished quite considerably in the last few days. Are people waiting for events to play out or generally trading much lighter? A: I think in general the trading has become lighter, but over and above what doesn’t work too well for India is the fact that the interest level in India is diminishing on a daily basis. Not only have we not been able to get our internal situation right and warrant for the world to look at us with a different perspective, but I think investors globally are more concerned as to how events are going to unfold in Europe, how corporate America is going to deal with the potential slowdown, especially given how the dollar has been behaving against all currencies. Corporate American profits have to increase significantly to counter the impact of the dollar. We are seeing a trend across all emerging market currencies in countries which are running a fiscal deficit, whether it’s Brazil or South African Rand or the Indian rupee, which is for the time being making investors skeptical about whether this is the time to revisit emerging markets. So it’s more a question about bigger issues that have the interest of FII’s currently. India is not able to make a strong case for itself and therefore we are just lost in the woods. I don’t see that changing anytime soon until we hear about some big bang domestic news flow that would ask overseas investors to reconsider India. Q: The first one of the block in terms of earnings will be IT and the market seems quite wary about that sector. How are you guys calling it? A: I admit the market is wary, but if we are looking at it purely from an earnings perspective, given the potential earnings surprises or disappoints we could get this quarter, we need to see what impact the rupee has had on a lot of the companies’ earnings. I think IT in that case is not a sector where I believe the market is expecting too much. I think the market has differentiated expectations very visibly. If you actually take the top three large cap stocks in the sector, you have got one stock trading at about 19 times and you have got the other two at about 13-14 times. So on one hand the market has clearly differentiated between expectations of earnings between the top IT companies, companies that have called or guided for a strong first quarter or first half. So I think these are companies that typically tend to deliver results in line with what their guidance has been. Therefore downside disappointment in this sector seems limited and therefore this is a sector that provides some sort of downside cushion going into earnings. I also think we have seen some incremental positives. We are going to see Cognizant’s results at the end of this month and I think that will also add to a little bit as to what the outlook is. While we are getting positive cues in terms of the H1B visa situation in India, with the 65,000 quota getting completely subscribed to, we are also hearing a lot of chatter about the anti-outsourcing sentiment that is emerging in America which could potentially have an impact. So I would say one has to be cautious, but I think the market has very well priced in what expectations one should have with IT stocks. I think there is very little room for disappointment from hereon and I think the currency would probably just be a further cushion on earnings for these companies. Disclosure: It is safe to assume that me, my firm and our clients may have an investment interest in the stocks or sectors discussed.