“India is at almost 40% premium to overall emerging markets and that is slightly higher than the average. The average is around 25%. It is somewhat concerning in the context of negative earnings revisions, We would rather see it flat on the historical average before we get more constructive on India.”
“It is better to remain relatively cautious and just keep doing the simple things that are working. In my coverage what is working is the markets and sectors that have upwards earnings revisions and they are almost invariably the commodity exporters. So Middle East, Latin America, Australia, Indonesia and indeed Singapore are the markets that we tend to prefer,” says Jonathan Garner, Chief Asia & Emerging Market Strategist & Chairman of Asset Allocation, Morgan Stanley.
At the start of this year you were saying that your year-end target for the Sensex would be 70,000 with the Union Budget being a catalyst. We did not know a lot of things back in January but now that we are in the middle of the year. What do you expect – neutral returns, negative returns?
That target is set by my colleague Ridham Desai and you are right it was set towards the start of the year. It is fair to say that we have all got incrementally more cautious since then. It is not unachievable. We actually think that after the S&P goes down to 3400-3500 near term, it will probably rally from there assuming that we escape a global recession.
That is the key thing that might keep the S&P at depressed levels and the India market too obviously if we get a global recession because that would lock in very low valuations. So again the comfort level around that has been reducing somewhat recently and that is where the debate is, that is why global markets have been under such pressure. That is how I would frame it. Yes that target is still achievable over the medium term but we need to avoid the global recession.
With what all has been announced by the US Fed and the Chairman Jerome Powell yesterday, there are many who believe that the US dollar may have peaked. Should that be good news for the EMs and also be good news for India?
Well yes, but there is no proof that is likely to sustain. It is certainly noteworthy. You are right to note but we want to see the establishment of a generalised dollar weakening trend before that would ease financial conditions in emerging markets. For example, the RBI would have less need to increase interest rates and all of that sort of environment. It is noteworthy that that was maybe the one day reaction or afternoon reaction to that hike.
We are debating right now whether it is going to be a soft landing or a hard landing. If there is a recession, then how much collateral damage do you think could happen to financial assets?
If you look at the emerging markets overall that I cover – I would say we are 450 days plus into a bear market. We are down around 30% from the peak. The China market at its worst was down 60% from the peak. We have come a long way already and if you look at our bear case target for emerging markets, the global recession would have maybe 10-15% further downside.
So we have come a long way, valuations are now starting to be outright cheap through EMs and that is true for India and for EM overall. So, we think we are late on in the bear market. The way the bear market ends in the emerging markets is not clear. It is not clear that oil is going to fall, the dollar will weaken, that the financial conditions are going to ease. It is also not clear where the earnings environment is.
It is better to remain relatively cautious and just keep doing the simple things that are working and in my coverage what is working is the markets and sectors that have upwards earnings revisions and they are almost invariably the commodity exporters so Middle East, Latin America, Australia, Indonesia and indeed Singapore, a market that trades a lot with ASEAN and has some energy representation in the index. These are the markets that we tend to prefer.
Where are you on this value versus growth debate because if interest rates are moving higher, asset repricing will also happen. Is the global style changing now that you mention that you are bullish on energy and commodity producers rather than consumers?
Yes, we were clear on that across all the markets and regions we cover and in our year ahead piece, last November we were overweight energy in every region and overweight value stocks in every region and that remains the case. Anything I would say is that the underperformance of growth, particularly long duration, low quality growth has been quite spectacular this year.
It is linked obviously to the underperformance of Nasdaq, for instance, versus the overall US equity markets. So yes, we do favour value relative to growth as a house view still.
India has always commanded a premium because of better corporate governance, ease of doing business and better return ratios which Indian companies always have delivered. Where does that fit in in this kind of a world where everything is getting reset?
Yes, we can be relatively precise on the valuation premium for India. It is at round 40% premium to overall emerging markets and that is slightly higher than the average. The average is around 25%. It is somewhat concerning in the context of negative earnings revisions, We would rather see it flat on the historical average before we get more constructive on India.
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