Prefer DMs over EMs; equal weight on India: Morgan Stanley

Jonathan Garner, managing director, Morgan Stanley currently prefers betting on developed markets (DMs) over emerging markets (EMs) like India, Indonesia, Brazil and South Africa. He is hopeful of the US growing at a better pace going forward and sees a 70 percent probability of the US Federal Reserve tapering by March. 

In an interview to CNBC-TV18, he said, elections are scheduled next year in all these countries, he remains cautious on all these markets not just because of the political risk, but because of funding risk issues. Also Read: UBS says good time to enter mkt, picks 9 favourites stocks Meanwhile, Morgan Stanley currently has an equal weight rating on India. Garner sees the rupee trading in the range of 63-64/USD and recommends betting on export-oriented companies in India. According to him, elections will be the key trigger for India next year and is looking for strong structural reforms post 2014 polls. From the EM basket, he likes China given its cheap valuations and the recently announced reforms. Between Indian and China, he would bet on the latter. Below is the edited transcript of Jonathan Garner’s interview with CNBC-TV18 Q: How do you think the elections could impact a market like India? A: We have a number of countries with important elections next year, not just in India, but also Indonesia, Brazil and South Africa. These elections offer an opportunity for voters to consider the reform agenda that is put together by the different political parties. It may allow the recent underperformance of markets like India and other markets to turnaround. At the moment we are remaining quite cautious on all of the markets that I have mentioned, not really because of political risk, but because of funding risk issues. Like India, other countries are running external imbalances and like India we think that the environment of strong dollar and rising US interest rates we get a continuation of kind of market pressures that we have seen on these countries throughout this year. Q: That fragility has somewhat declined in the last several months. The latest Current Account Deficit (CAD) number indicates it is as narrow as 1 percent of the GDP and substantially lower in aggregate dollar terms. Does that change the view on India? A: India has actually had the biggest improvement in the current accounts among the countries that we have been concerned about. However that has been achieved with very slow growth and also through relatively ad hoc import control measures, specifically on gold. It is not clear just whether we have turned the structural corner there, but certainly the India's external position has improved more than the average. Q: How are you approaching the elections itself? Would the return of the same party, same government disturb investors like you? Would a third front coalition neither the ruling UPA, nor the challenging NDA seriously disturb your equanimity? Will you all cash out? A: I cannot comment on individual political parties. We do not do that in any countries. We need an agenda that delivers in relation to a structural increase in the investment as proportion of GDP in India. We would be looking for an environment where the growth rate can start to recover having actually moved to a structurally lower level in recent years. Q: What about December 6th nonfarm payroll numbers? Would they be big enough if they were strong to change the taper timetable? Can taper start this month itself and will that alter your view on emerging market equities? A: The taper itself is one of the reasons why the equity multiple in EM has been under pressure this year. We think there is about a 70 percent probability that the Fed tapers by March. We are not really in the camp that it would happen in this month or January, but we need to watch the data. We are expecting growth in the US to pick up going forward and that is one of the reasons why we prefer DM equities over EM equities.