We have a 40,000 target for Sensex if all goes well: Morgan Stanley

What has been done to make India more accessible to FDI and portfolio investment are important developments, but the stability of the financial system is more crucial, says Jonathan Garner, Chief Asia & Emerging Market Strategist & Chairman of Asset Allocation.


What is the kind of earning revision trends that you have been looking at and where does India stand right now? How are you assessing the current situation based on the kind of earnings and commentary that we have been seeing?
If you look across our coverage, what is very noticeable by market is the way that the earnings estimates in north east Asia, particularly China, Korea and Taiwan, have turned out more rapidly and to a greater extent than those elsewhere in our coverage universe.

In India’s case there is an improvement and in terms of earnings revision breadth, it is more in the middle of the pack. Latin America in particular is lacking and that is reflected in the performance of Latin America.

Given that you are seeing some improvement and the fact that we continue to see fairly strong liquidity post central bank action globally, do you expect Indian markets to trend higher from here? Is there enough interest opportunity or are valuations starting to look overpriced?
Again, it is in the middle of the pack and we have given an equal weight recommendation. We could see Sensex at around 40,000 again if all goes well, but we continue to have greater upside particularly for the China equity indices and must notably the Asia Index. One of the things we are monitoring is liquidity and retail investor sentiment. When you look at account openings, margin, futures trading and broad money growth -- all that is stronger in China and Korea than in India and parts of Latin America and East and Middle East Africa.

In terms of reforms or structural moves from the government, is there anything that you would have liked to see from India? There has been so much talk of India taking advantage of the current tensions between US and China, but Chinese markets continue to be front and centre when it comes to this part of the world. What more could India do to create more traction here?
One of the key things that we have been consistently emphasising in recent years is credit creation and in getting the public sector banks in a better shape. There has been some action but we also had a shadow banking credit crunch in India. It is really important for the overall economy and earnings to move forward, but you have a more stable and persistent source of credit for businesses and households and that is probably the single most important thing. It is not to underestimate what has been done in terms of making India more accessible to foreign direct investment for example and portfolio investment. These are important developments but I think it is the stability of the financial system that is crucial.

The markets globally might see a sharp fall, perhaps from October. What are the risks that you see?
Yes, we have got a US presidential election cycle and the markets in the US can be weak in the two or three months running up to that and that will obviously be in November. We have gone through obviously a very sharp recovery in markets and so it is really important to monitor whether earnings do come through. That is good news in that sense but US and European earnings cycle has begun relatively well and we obviously have US-China tensions and that needs to be monitored very closely, but we have come a long way in a short period of time. Markets for the overall EM index are at about 4-5% above our index target. We are certainly not in an environment where we would be recommending a strong buy right now.

What could run a risk for India because sporadically some of the states are entering into miniature lockdowns. Do you see that as a risk and could that really pose a threat to the 40,000 target that you set out for the Sensex?
Oh! Yes it certainly could and we are monitoring the lockdowns and interruptions to economic activity very carefully. The nationwide lockdown has stopped not just in India but in most geographies. We are seeing a very divergent pattern in terms of new Covid cases and the pressure on the economy and on the consumers. Again broadly speaking, Latin America, East or Middle East, Africa and South Asia are performing less well than Northeast Asia and that is a very pronounced difference in relation to Covid.

With reference to impending US elections, one sees the dollar weakness playing out especially in the dollar linked assets. In case of precious commodities, gold has hit a nine-year high, silver is at a seven-year high already. Do you see the dollar weaken further closer to the US election?
We certainly have been arguing for a weaker dollar, particularly against the Euro. We had this Eurozone recovery fund which is again very important structural development and the dollar is obviously affected by Fed policy. More than the US election cycle and if you look at long maturity real interest rates in the US, what you see is that the 10-year maturity real interest rates are at around minus 90 bps and those real interest rates are going further into a negative territory. That tells us that the markets are expecting the Fed to be even more stimulative and actually the phase of certain growth environment in the US and that is likely to weaken the US dollar.

It is said that every cycle and every crisis creates a new opportunity but what we have seen in global markets and local markets that the previous winners have only become the outperformers like the US Tech companies, Indian consumer companies, selective private banks. Do you think the trend of this mega cap concentration is a global phenomenon which will last for the next couple of quarters?
Jonathan Garner: Certainly. The momentum factors are exceptionally strong globally. It turns out that many of the business models that were already doing well particularly in the e-commerce, internet space. For example, selective consumer businesses are doing even better in this work from home environment and so it is important to monitor valuations. If you look at growth stocks, relative to value stocks they are at all-time high valuations. So, that is not back to value stocks. Industrials, energy materials and overall financials would be linked to how strongly economic recovery may be as we go into 2021. Rising real interest rates typically help value stocks to better and you might get some rotation out of growth stocks.

Given that right now the global narrative is against China, do you think global investors could relook at reducing their weightage towards Chinese equities in general? For global investors who follow MSCI benchmarking, China has a very large position but frankly the narrative for Chinese manufacturing companies, Chinese internet companies and Chinese banks is not all that great?
Global investors have actually been reducing. They are underweight on China in recent months and in fact they are less below benchmark than they have been at any stage since 2009. That is related to the better economic performance and better earnings revisions patterns that we are seeing. In that sense, investors are not expressing a significant concern on US-China tensions. However, we recommend exposure to Asia’s where foreign investors are much less of an important feature of trading volumes rather than the US listed ADRs which would be more at risk if there is further escalation of US-China tensions.