We believe in cyclical recovery story in India: Jonathan Garner

For the time being we are overweight but it is not without its risks, Jonathan Garner, Chief Strategist Asia & Emerging-Markets, Morgan Stanley, tells ET Now. 65466981 65437880 65440950 Edited excerpts: You are making a case of a reversal for emerging markets in Asia. Do you think that the Turkey problem can snowball and result in the broader trade across emerging markets turning negative? We have done our third round of target price downgrades this year. We did a round of downgrades in February and June and again last week. As for target for EMs, it is about 8% below current levels. We have taken our earnings forecast and multiple forecasts down again.We would highlight the breakout to the upside in the dollar on firming US growth and on Fed expectations and the downside in renminbi on falling Chinese rates. The decline in copper price is important and the weakness in global PMIs which will start further underperformance in Korea. This is typically what you get in a bear markets in the EM. The dispute between Turkey and the US is causing associated weakness in EM currencies to a larger external financing needs and about 30% of EM has reserve coverage, that is less than two years of financing needs.We have quite larger outflows from Asia and EM dedicated equity funds. About 20% of the money that came in last year has left this year. To that extent, it is not yet a fully mature outflow period. Our tech team has downgraded the semi conductor industry which is a key early for mid-cycle cyclical and is indicating problems to come and important earnings message at the stock level in recent announcements. We suspect that there will be further downside from here in our markets. What is the view on India vis-à-vis the ballooning current account deficit? This time around, it came in at a five-year high but still India continues to see inflows even from FIIs. On a weekly basis, China, Hong Kong, Singapore, South Korea all are giving negative returns. India is in the green and has managed to outperform. We believe in the cyclical recovery story in India for now and we have been trying to play that for some time. We are overweight India. First, we are underweight Korea that you just mentioned. I do think that you will have to manage current account quite carefully because India is one of those countries that does not have such strong reserve coverage like Taiwan or Thailand or China. We have to be careful about whether the current account is becoming a constraint. India has already had to hike rates twice into an improving domestic economy and for the time being we are overweight but it is not without its risks. The earnings recovery cycle has been uneven in India. Could both demand and earnings recovery surprise us? Yes, we do think so, at least for now because India had this very prolonged period of weak economic growth due to GST reform, demonetisation and fiscal tightening. There is a lot of pent up demand in the system that is coming through. It is a very different phase of the business cycle. For example, China had been aggressively tightening very recently and growth has been decelerating rapidly. India is also not that exposed to US trade and tariff protectionism compared to the countries of North Asia. There are a number of positives and that is why we are overweight India. Last time, when we talked you said that all markets will fall. You said India will also fall but it will fall less. That fall has taken place. Do you think Indian markets can outperform in a falling environment or will the story will remain the same which is that everything will fall and India will fall less? Yes, that is up four months in a falling market and it is doing exactly that because of the things we talked about on this interview. Obviously, the dollar performance is not so strong but it is outperforming, particularly these markets in North Asia that are more trade sensitive. So, yes it has been a good year for India. We have been overweight earlier also and though the absolute performance is not good, it has been very good relative performance. We have been talking about this currency weakness across the globe. How much of that has to do with what happened in Turkey -- a local problem -- versus the dollar strength in lieu of rising interest rates. Would that continue to pressure emerging market flows? Emerging currencies have weakened right from the start of the year. It really has to do with the divergence in US monetary and fiscal policies versus the rest of the world in the context of US growth continuing to surprise on the upside and world growth surprising on the downside. The Turkey issue is not the prime driver of why EM currencies have been weak this year.

from The Economic Times https://ift.tt/2MCKV81