India to gain from global appetite for risk assets: Jayesh Gandhi, Morgan Stanley


Jayesh Gandhi, executive director and lead portfolio manager for large- and mid-cap equity strategies, Morgan Stanley Investment Management India, says the liquidity situation in the global environment continues to remain supportive with the top three central banks of the world trying to stimulate their economies. In a freewheeling chat with ET, Gandhi said, “This global environment of low interest rates and abundance of liquidity could remain conducive towards risky assets in general for some time and India would stand to benefit from it.” Edited excerpts:

Can recent numbers on inflation and industrial production be construed as a turnaround for the economy? What is your outlook?

Decline in inflation is a big positive. Inflation, which spiked since the beginning of 2011 post QE2, has been particularly sticky in India. Over the past two years, it has been the endeavour of the RBI and the government to rein in inflation. What we are seeing now is strong evidence that finally WPI is coming under control.

Core inflation is below 4% and evidence of prices of food grains, vegetable in March suggests that the retail price inflation, which is in double digits, could also reduce. On the other hand, industrial production is still weak but over the next few months it could see positive movement, albeit gradually. Hence, the data today is mixed, suggesting that the economic growth has probably bottomed and an uptick is imminent. Therefore, in the next six months, if inflation and interest rates come down and the currency remains stable, we could start seeing strong signs of economic growth pick-up.

One of the concerns is whether political uncertainty will pull back reforms push. How do you see it?

I am no political expert but my sense is we’ll have to wait and see whether the government’s reform agenda, which got under way since September last year, continues. The reform and policy initiatives taken by the government so far are appropriate, but could be termed as work-inprogress.

There is more that needs to be done, particularly on ensuring the fiscal deficit plan the FM formulated in the Budget. It’s very important that we increase prices of some of the petroleum products so that consumption normalises and the trade deficit, which is very high, comes under meaningful control. It’s important to initiate measures to boost exports.

Similarly, it’s equally important to kick-start and revive the investment cycle. If I look at history (the pullout by TMC), the government has continued to remain pretty much on track in terms of reforms and policy initiatives. If policy action continues, I am confident that we would see an economic growth recovery.

Another issue is the impact on FIIs flows to stock market.

The fund-flow mix by foreign investors is a complex process, which takes into account not only India specific factors but also relative EM (emerging markets) factors. Therefore, domestic politics is one of the many factors that can have an impact. The liquidity situation in the global environment continues to remain supportive. The top three central banks of the world are trying to stimulate their economies.

In such an environment of low interest rates and abundance of global liquidity, risk assets generally perform well. Money is flowing towards emerging economies, in search of higher yields and returns. This global environment could remain conducive towards risk assets in general for some time and India would stand to benefit from it.

Do you see a trend of FIIs investing more in EM debt?

In India, there is maximum cap on FII investment in debt. We have seen a constant flow of funds coming into debt securities. The reduction of withholding tax had made investments in debt more attractive. 2012 saw a record inflow into EM debt and as investors get a bit worried about interest rates going up or if there is a view that global growth could revive, then the money could flow into EM equity as well.

Earnings from early April could give a direction to the market. What is your expectation?

FY13 profit growth would be muted looking at the nine-month numbers. The profit growth for the top 100 listed companies could be in the mid-single digit range, second year in a row. One of the key reasons why corporate profits were hit in the last two years was a steep increase in interest costs and input cost inflation affecting raw material costs.

What we are likely to see over the next 12-18 months, as inflation subsides and interest costs come down, there could be an improvement in profitability. One could also see a low demand environment in the first half of FY14. So the sales number could be under pressure. FY14 estimates suggest a 10-15% profit growth range, which looks possible, but the visibility of that could emerge in the second half.

Does Morgan Stanley MF follow sectoral allocation in large and mid-caps or take a bottom-up approach?

Our investment process incorporates a combination of both topdown and bottom-up. From a topdown perspective, macroeconomic conditions and trends are the key determinants to develop a framework and overall sector allocation of the portfolio. However, bottom-up security selections remain central to the equity investment process.

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