Indian equities vulnerable to US subprime crisis
Concerns over US subprime credit defaults will continue to nag Indian equities market in 2008, said Morgan Stanley analysts. In a recent strategy note, the investment bank said the coming year is likely to witness a soft landing in the domestic economy, compression in India’s relative equity valuations, slower earnings growth, peaking in corporate activity, record equity issuances and lower trading volumes.
“Our base case still calls for downside to equities and is premised on disappointment in US growth and its related impact on risk appetite,” the report said, adding, “given India’s premium valuations, the market’s tendency to gain beta in falling markets and the incessant speculation that seems to be the key driver of markets currently, Indian equities are vulnerable to underperformance if the US macro stumbles.”
Morgan Stanley said volatility would continue as the forecast range for the Sensex is going to be in the range of 11,022 to 28,000. The point of debate for 2008 would be how a booming Indian economy counters the economic slowdown in the US, a prime supplier of capital to India. Such a contrast in macro economic conditions lends itself to extreme volatility on the bourses and makes it difficult to forecast year-end results, the report said.
Morgan Stanley suggests that the current valuations may not really excite the bulls. “The MSCI India index is trading at a trailing P/E multiple of 30 times and a trailing P/B multiple of 5.9 times, both around 2= sigma above average, the market does not look cheap,” it said
“India started the year with a trailing P/E of 23 times (MSCI India) and is now trading at 30 times consensus earnings. All of the equity market’s relative gains this year have come from a P/E expansion. Against this backdrop, it will be hard to predict another year of P/E gain for Indian equities,” the report added.
With reference to sector picks, the investment prefers “selective mid-cap exposure with emphasis on out-of-favour and large cap stocks”. “We are underweight on utilities where we believe valuations have run ahead of fundamentals and we are neutrally positioned in the technology sector where we believe that a lot of bad news is now in the price,” the report added.
Morgan Stanley feels rising participation from domestic investors and a strong seasonal effect are immediate tail winds for the Indian equity market. In the short run, strong earnings revisions, RBI’s comfortable liquidity position (with over $75 billion in sterilized liquidity), a benign political environment, strong sentiment, growing success of the Central Bank in soft landing economic growth and robust corporate balance sheets are likely to back the bulls strongly.
However, with the RBI engineering a soft landing, economic growth is likely to slow down a bit in 2008. “Our economist believes that growth will likely slow from 9.1% in the first half of F2008 to 8.4% by the end of F2008 and to 7.2% in F2009. Unless inflation resurges, or a political event makes inflation targetting more important, the downside risks to growth are contained,” the report reassured.
“Our base case still calls for downside to equities and is premised on disappointment in US growth and its related impact on risk appetite,” the report said, adding, “given India’s premium valuations, the market’s tendency to gain beta in falling markets and the incessant speculation that seems to be the key driver of markets currently, Indian equities are vulnerable to underperformance if the US macro stumbles.”
Morgan Stanley said volatility would continue as the forecast range for the Sensex is going to be in the range of 11,022 to 28,000. The point of debate for 2008 would be how a booming Indian economy counters the economic slowdown in the US, a prime supplier of capital to India. Such a contrast in macro economic conditions lends itself to extreme volatility on the bourses and makes it difficult to forecast year-end results, the report said.
Morgan Stanley suggests that the current valuations may not really excite the bulls. “The MSCI India index is trading at a trailing P/E multiple of 30 times and a trailing P/B multiple of 5.9 times, both around 2= sigma above average, the market does not look cheap,” it said
“India started the year with a trailing P/E of 23 times (MSCI India) and is now trading at 30 times consensus earnings. All of the equity market’s relative gains this year have come from a P/E expansion. Against this backdrop, it will be hard to predict another year of P/E gain for Indian equities,” the report added.
With reference to sector picks, the investment prefers “selective mid-cap exposure with emphasis on out-of-favour and large cap stocks”. “We are underweight on utilities where we believe valuations have run ahead of fundamentals and we are neutrally positioned in the technology sector where we believe that a lot of bad news is now in the price,” the report added.
Morgan Stanley feels rising participation from domestic investors and a strong seasonal effect are immediate tail winds for the Indian equity market. In the short run, strong earnings revisions, RBI’s comfortable liquidity position (with over $75 billion in sterilized liquidity), a benign political environment, strong sentiment, growing success of the Central Bank in soft landing economic growth and robust corporate balance sheets are likely to back the bulls strongly.
However, with the RBI engineering a soft landing, economic growth is likely to slow down a bit in 2008. “Our economist believes that growth will likely slow from 9.1% in the first half of F2008 to 8.4% by the end of F2008 and to 7.2% in F2009. Unless inflation resurges, or a political event makes inflation targetting more important, the downside risks to growth are contained,” the report reassured.
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