Morgan Stanley more bullish on China than India
It expects 2018 to be a tough year for the markets, even though there are catalysts supportive of a continued rally
Morgan Stanley has reduced the size of its overweight rating on India for 2018 to accommodate Brazil’s upgrade to the overweight category where they expect a significant economic growth. China is its biggest overweight in the global context.
“We reduce our overweight on India from +250 basis points (bps) to +150 bps previously. Key bull points for India in terms of the country model are increasing dividend yield trend relative to its country peers, combined with constructive views from our economist and country strategist. Weaker scores for India are its weak return on equity (RoE) and net margin trend,” a Morgan Stanley report co-authored by Jonathan Garner, their chief Asia and emerging markets equity strategist, says.
However, they believe India is likely to remain in the midst of a domestic liquidity super-cycle. Over the next 10 years, it expects $420-525 billion in domestic equity inflows that could have the power to keep India's relative multiples higher for longer. That said, the two key risks for India, according to the research house, are the rising oil prices and the fact that 2018 will see a number of state/assembly elections, which can keep the markets volatile.
Going ahead, it expects 2018 to be a tough year for the markets, even though there are catalysts supportive of a continued rally. Central bank tightening globally and balance-sheet reduction in the US, slowdown in growth in China, busy election calendar in the Asia Pacific region (ex-Japan) and a rise in oil prices are some of the key things that the markets will have to grapple with.
In the Indian context, Morgan Stanley expects the real gross domestic product (GDP) growth to accelerate to 7.5 per cent in FY19 and to 7.7 per cent in FY20, from 6.7 per cent in FY18, as the economy has already worked off the headwinds posed by demonetisation and the implementation of the goods and services tax (GST). A pick-up in growth and consumption, in turn, will help boost private capex.
In terms of sectors, they still continue to prefer banks; remain overweight on capital goods, food & beverage and tobacco sectors. Pharmaceuticals, household and personal products (fast moving consumer goods) remain their key underweights in the Indian context.
“For India household and personal products, stocks look rich and margins are likely to decline due to higher material costs and competition, and are therefore a headwind to the earnings outlook. We also remain underweight on the largest pharma name — Sun Pharma — where we believe earnings should compress in the near term in view of lower US business — lack of new approvals, delay in Halol resolution, pricing risk at Taro portfolio — and higher opex (specialty frontend/R&D),” the report says.