Morgan Stanley’s executive director, Malcolm Wood is still underweight on India

Morgan Stanley’s executive director, Malcolm Wood, cut India to underweight when people were talking about a pre-Budget rally in India. The signs were clear that India was getting much higher than it deserved. A correction was inevitable.

India did see a 15% correction, but Mr Wood continues to be underweight on India and is sceptical about real estate plays. ET spoke to Mr Wood to understand his views on India and emerging markets. Here are excerpts from the interview:

What are your concerns on the Indian market?

The key concerns about the Indian market are domestic liquidity and rising interest rates. Since the current boom in the equity market, interest rates have fallen or remained stable. But an upward tick on interest rates with the market moving up is a warning sign. The market can’t ignore the rise in interest rates.

The 9% growth that India is talking about, along with high interest rates, seems far too optimistic. The other concern is free liquidity. Data shows that credit growth has been much faster than deposit rate. So, there may be a time when liquidity is tight within the banking system and this may force banks to hike interest rates.

We are underweight on India. What surprises us is that the market has continued to rally on account of the current liquidity condition. The mediumterm story of India continues to look good. But the short-term story seems to be a cause for worry. You can enter the Indian market after a 15% correction.

Valuations may be on the higher side, but doesn’t India deserve a growth premium?

There’s no doubt about the growth story. But India’s premium continues to remain on the higher side. It’s not that it may not be sustainable, but India needs to earn that growth. As far as the growth premium is concerned, there are two parts to it — growth rate and discount rate. India has a high growth rate.

But what many market players are not considering at this point in time is the discount part, which is the risk. India has a high discount rate and a much higher growth rate to compensate for the risk.

India’s indicators are all high at this point. This indicates that there is only one way to go — downwards. India’s indicators have been high for quite some time; hence, there are serious concerns now. That’s why, as per our methodology, the earnings picture looks better somewhere else.
But the Chinese indicators have moved up and stayed there for a long time. Can’t the same happen in India?

What has India done compared to China? For one, China has seen huge investments and its capital has grown very rapidly. This is absent in India — India is trying, but it looks tough. Policymaking is better in China than in India.

The Chinese deficit is absent, CPI is less than 2% and the credit rate is on the higher side. India’s far behind on this count, but it can reach there. A transition is required, but as an outsider, we would like to see the government step aside and let the private sector build it up.

So, which are your favourite markets?

I’m bullish on the Asia Pacific region. Taiwan, Singapore and Malaysia look attractive as of now. The global soft landing, easing of raw material pressures, persistent low interest rates, firm currency and low liquidity conditions look good — Asia Pacific has seen the strongest money growth in the past 10-15 years, primarily driven by huge trade surpluses in that region.

The valuation for these markets is fair and sentiment can rise further from here. All these elements put together will generate low double-digit returns in this region for the year. India is an exception to all these elements.

At this point in time, what do you like in India?

Within Asia, our best sectors are finance (banks and insurance) and technology (hardware) in Taiwan. In India, some of the consumer demand-driven stocks look good to us. Bharti Airtel looks attractive. I’m a bit sceptical on energy, but my Indian counterpart differs on this.

The only Indian stock on my model portfolio is a pharma company (Sun Pharma). If I were running a portfolio of stocks in India, I would be more biased towards defensives in the domestic part of the economy (FMCG) than the exporters. This is what will give most protection during a correction.

What’s your take on real estate stocks in India?

Rising interest rates are not good for the real estate and construction sectors, particularly those focused on residential development. So, it will be a challenge for the sector, which is aggressively valued at this point in time. The other challenge is the amount of space these companies have built and are claiming to build.

Companies claim that they will build 25 times more in the next five years than what they have built till date. How do you know who will scale up and actually build what they are claiming? I’m quite sure some of these companies are exaggerating. So, two things have to be considered here — rising interest rates and the speed at which companies can scale up.