Don't buy dips aggressively; OW on India, like IT outsourcing cos: Morgan Stanley

When asked what sign-posts investors should look at now, he said we need to see a 5-10 percent upside for the base case targets, then we need to see a less weak US dollar and rise in US 10-year yields to slowdown.

We also need some outflows from equity markets, particular after the euphoric inflows because typically markets do not trough until there have been couple of days and would also like analysts’ earnings estimate come down and that could take 4-6 weeks.

It is time to be cautious on equity markets and one should no hurry to buy into it, he said.

With regards to Indian market, he does not think there is going to be an upside and one would make money only on dividends. For Sensex, his target is around 35,700 by 2018-end.

India is a market they are overweight on and would be inclined to buy India on a dip and parts of China market but are underweight on Korea, Indonesia, Australia, said Garner.

He said, within the Indian market, the house is overweight on consumer discretionary, financial on declining credit costs and IT outsourcing names that are under owned and undervalued.

The picking order with regards to markets for the house is Brazil, China and then India, he said.

Below is the verbatim transcript of the interview:

Q: I was going through your recent note where you say that 2018 may begin well but will end badly. It seems like a bad beginning for us. What is the sense you are getting hereon?

A: We had a very strong January, in fact one of the strongest big start to a year ever in global equities but in the first part of February things have taken a turn for the worse. I think the problem is that in terms of valuations, so non-financial part of global equities universe and particularly for tech, we run extremely high valuations. We also have had earnings estimates in place. Generally and in particular I would say in the growth sectors that are too high and we had euphoric investor sentiment, in fact in third week of January we had an all-time high inflow week dedicated to EM equity funds. So that is now undergoing a re-appraisal but we quite worry in terms of price but broadly for the region we only now returned to what we think is a reasonable base case target for the end of the year. So we do not think that this is a dip that needs to be bought aggressively.

Q: What will you watch now? Do US yields start climbing up again? Will that be a spot of bother? What are the signposts that investors should look at?

A: We put out a quick note on February 6th around signposts. First, as I was mentioning that we need to see clear blue sky upside to base case targets, so 5-10 percent upside as targets. We did achieve that for Tokyo Stock Price Index (TOPIX) yesterday at the intraday low for TOPIX; it was about 6 percent below our target but the rest of the region didn’t achieve that and we need to see a less weak US dollar and we need the rise in US 10-year to slowdown. I think that discount rate effect on the valuation of equities is one of the reasons why we had the correction. We also want to see some outflow period after this euphoric inflow. Typically market do not trough until you had at least a couple of days of very large outflows. We haven’t got the data for yesterday but on Monday there were inflows ongoing and we also want to see as analysts’ earnings estimates come down somewhat and that would take longest in terms of four to six weeks before the analysts move that number to more reasonable level. But I think it is quite a serious momentum market. It’s one that we were anticipating to some extent and we want to be cautious here. I do not think that this is something that is a dip to buy straightaway.

Q: If you are cautious do you get a sense that this is just an interruption of a bull market or could this be the possibility that it is a start of a bear market as well?

A: Our economists are still very sanguine about growth for this year but that is largely been priced in. The question is about growth in 2019 and some of the cycles in markets typically lead an economic downturn for example, things like the construction sector in China is starting to look somewhat more problematic. So I would come back again to our base case target for yearend and we overshot them given how much the market gone up January, overshot them significantly and as things stand there is still no upside essentially to our yearend targets. So that is the view.

Q: You do not want the dip to be bought, you do not expect it to be bought. You think therefore Asian indices may grind lower and what is your Nifty or Sensex target?

A: In terms of the overall story here we think, as I say -- I do not know exactly how the powerful move but essentially there is zero upside. So in terms of Sensex 35,700 is the roundabout 3-4 percent upside doesn’t quite mean that criteria having clear 5-10 percent but India is a market that we are overweight. We are inclined to buy India on a dip and in fact parts of China market and for example our key underweights like Korea or Indonesia or Australia where there are much more fundamental problems around valuations or macros or sector composition. So in terms of within the Indian market, my colleague Ridham Desai is overweight consumer discretionary, on strong consumer loan growth and also financials on declining credit cost and we are also quite interested in the IT outsourcing names, technology outsourcing names that are under owned and seems to be undervalued. So it is a sector that has been quite unloved compared to broader internet or tech names in north Asia but Indian outsourcing software names are getting more interesting to us.

Q: When you say 35,700 on the Sensex. Is that by the end of 2018?

A: Yes.

Q: You also moderated your overweight on India. Is it also because other emerging markets maybe looking a little more attractive now or is it very India specific?

A: We reduced our overweight somewhat. Our overweight are Brazil which is our big upgrade, which is the best performing market in the world year-to-date. There is a very specific story around growth acceleration and risk premium reduction and then China and India in order. It’s the lesser weighted of our overweight.