Overweight India; inflation targeting good: Morgan Stanley

Latha: What have you made of the Indian Budget? Post that, are you enthused to put more money in India? At the moment what are you looking at in terms of say, returns from the Indian index in 12 months?

A: We are overweight India in the Pan Asia and the emerging markets (EM) context. We have a Sensex target of 32,500. So, that is more upside than we see for the region overall. In terms of the Budget there was a slight negative in relation to the fiscal negative coming in as targeted 3.9 percent of Gross Domestic Product (GDP). We were looking more for 3.6 percent of GDP but we certainly like the emphasis on capital expenditure (capex) in the Budget and infrastructure. That was an important positive.

Sonia: There has been higher public spending for infrastructure and also states have been given higher flexibility for spending versus what it was earlier. How much of a multiplier effect that could have and in your assessment how long do you think it could take before we see the capex cycle recover?

A: Certainly if you look at what my colleagues in India are recommending and we agree with this then having an exposure to industrial cyclicals makes a lot of sense to us as well as the consumer discretionary sector. We are expecting a growth pick up in India. As you know the gross domestic product (GDP) series has been revised, that makes it little bit more difficult but on the basis of the old series we were looking for a pickup towards seven percent or so. So, that would be on the new series from round about eight and half and if we look at the actual outlook for India an important positive in addition to growth pickup is we have noticed a major reduction in inflationary pressure and again that should help the monetary authorities to ease monetary policy.

Latha: When you speak of 32,000 that is say, about ten percent rise from here on what would be the leaders in that last 3,000 lap?

A: Again we like private sector financials and we also like the consumer discretionary and the industrial cyclicals area. We are a little bit more lukewarm on software names given we expect the rupee to be at least stable if not on appreciating trend but we have retained our core exposure to generic pharma stocks.

Sonia: What about the FMCG stocks like ITC which has been under quite a bit of pressure post the excise hike on cigarettes? Would you be interested in buying any of these dips there?

A: We are not so interested in the staples name. So I can’t comment on stock specifics because I haven’t got regulatory approvals to do that.

Latha: Yesterday it was made public but a few days back the government and the reserve bank signed a monetary policy pact which now makes India officially an inflation targeting country. Does that mean anything when you look at the macros and under the circumstances given the way in which inflation and growth are trending is India in for a rating upgrade at all?

A: Yes, inflation targeting is a good thing. There is plenty of academic evidence that independent central banks which operate to an inflation target performs better in terms of lower volatility of growth in inflation. So that is an important positive and it will enhance credibility of the monetary authorities.

Sonia: You did say that you are overweight on the Indian markets. How does that stack India up versus the other EMs for the rest of the year and versus developed markets as well?

A: We expect India to outperform other Asian markets. It is not only India that we are overweight, we are also overweight China. They have similarities in terms of monetary policy easing, and relatively resilient to growth. We think in both cases the growth cycle is poised to accelerate and we are more cautious on particularly commodity exporting countries in the EMEA and Latin America.