Near-term Sensex target at 29000; constructive on India: MS

Latha: The European Central Bank (ECB) has promised its unanimous support for unconventional steps and the last US Gross Domestic Product (GDP) number came in fairly strong at 3.5. So would you say that equities are going to be in a sweet spot with growth in the mother market and liquidity in the others?

A: Yes, I spent most of this week in Japan. Last Friday the Bank of Japan did a major easing of its own QE programme. So yes, we have already had QE from one of the major central bank’s expanded QE. Now there is a prospect of this in Europe. Clearly US monetary policy goes the other way. So we think at Morgan Stanley that we are in a world of very strong US dollar going forward and certainly we are still bullish on global equities overall.

Sonia: So when you say bullish on global equities where does India feature on that list because we have already been a huge outperformer year-to-date (Y-T-D)?

A: Yes, after being a very significant underperformer last year. For example if you look over the last three year take the medium term view India is essentially in line with rest of the emerging markets with quite a lot of volatility. But certainly we are constructive on India here. You were just talking about lower commodity prices which is another feature of the current global environment and that in terms of trade effect is positive for India whereas it is negative for some of the countries that were underweight like Brazil and South Africa which are major commodity exporters.

So yes, we like India, we have a near term Sensex target of about 29,000 and we could probably do better than that over the medium to longer term.

Latha: Can you give us a little more of your perspective on the jobs data that is expected later today in the US and in general how much more upsides can you see in the S&P 500?

A: The target on the S&P 500 is 2150 in the near term target and the jobs numbers will be reasonably strong probably about 250,000 on non-farm payrolls. More importantly now we are starting to see a positive dynamic of wage growth and improvement in underlying incomes in the US which should again allow the GDP acceleration to continue and we are looking at something like 2.8 percent US GDP growth next year.

Latha: What about the Indian numbers itself. We still get fairly poor industrial output numbers and Purchasing Managers’ Index (PMI) numbers in India. How long will the patience hold?

A: It does require some time again you were touching earlier on corporate earnings where the earnings revisions are somewhat neutral but they are better than many of the countries we follow, countries like Brazil, Korea where we have meaningful downwards revisions but as strong as Japan which is in the middle of a major upside move in earnings.

So again we watch this quite closely. We have been looking at the cyclical factors in India and getting more instant knows and lightening up a little bit on the pharma and software space which obviously outperformed last year.

Sonia: So within the export theme between pharma and IT which is the one that you would take money out of first?

A: We took money out of IT and kept pharma exposure and if you look at the overall market. We have also been emphasising the financials on the private banks in particular which should do well in a more reflationary environments and again lower bond yields should help the financial sector.

Latha: There is a lot cry that the Reserve Bank of India (RBI) should cut rates and much of it is being pinned because the global crude prices in particular and commodities in general are receding. How would you as a foreign investor as an Foreign Institutional Investor (FII) react to what the RBI does? Would rate cut disappoint you if it came or would it be a matter of joy?

A: If you look at the way bond yields are already heading they are starting to discount a rate cut probably about 50 basis points over the short to medium term and that is in contrast of other countries we cover. Both Brazil and Russia have had to raise interest rates in the last four weeks or so. So you have got many reasons to be constructive on India here.

Sonia: The next big event from a political stand point is the winter session of parliament. What is your expectation as far as further reforms from the government are concerned?

A: We have really had some meaningful reforms particularly on diesel price reforms, what is crucial for India is land reforms actually and speeding up urbanisation and infrastructure investment. So that is an area we should look at and obviously the whole agenda of the ‘Made in India’ and generating a better manufacturing base in India the land issue is crucial in that.