Sensex: We have a bull case target of around 86,000 for Sensex: Jonathan Garner

“So for the investors that we advise, it is really a question of picking your spots and India is one of them,” says Jonathan Garner, Morgan Stanley.

Even though you believe that India is your top pick in the EM space, you are generally a bit cautious about the emerging market pack, at least for the first half of this year. What is your hypothesis and what are some of the areas which is giving you that kind of a tough process?
Yes, we really like India, it is our largest overweight, we are 150 bps over benchmark for the Pan-Asia EM investor. So along with Japan, it is a key pick. But for emerging markets more generally, to answer your question, the dollar is firming somewhat and we have had the view that the Fed would not be cutting rates in March and now the consensus has moved towards that view. So we still have a very high cost of capital environment and China is struggling and China is the largest market within EM. So for the investors that we advise, it is really a question of picking your spots and India is one of them. So popular narrative was that there could be a rate cut in March or mid of this year by US and other emerging markets could follow, Indonesia, India to some of them. How much delay do you expect there and where could it take the dollar index in your view, which got very oversold and now is in a rebound mode?
Yes, so we have had a long-standing view that the first Fed cut would come in June and now the consensus has moved towards our view and then it would be in our expectation really quite slow to reduce rates and that is because even though there is like disinflation, the US economy is still powering along quite well.

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So for India, that is not such a problem because the Indian economy, of course, is also doing very well. It is in a virtuous cycle of improving nominal growth, earnings growth, capital inflows. So the currency is far more resilient in the face of dollar strength than in the past.

But that is not true of other emerging markets. So again, China probably needs the currency to weaken, a large index constituent like South Africa does not have the kind of balance of payments that India now enjoys. So we think that the Federal Reserve will be cutting rates only quite slowly in this environment.

Slow and steady, because you do not want to undo what you have achieved so fast. Of course, the central banks will move very, very cautiously. But Jonathan, I wanted your take regarding what the narrative is regarding valuations in India, because they are not cheap by any metric and what I wanted to understand from you is what are the triggers lined up for the Indian markets because election is pretty much factored in and earnings, a lot of players are saying that the peak is behind because this earnings season as well, there were a bit more disappointments rather than positives?
Yes, so that is a great question. So our Sensex target is 74,000 base case from Ridham and the team. There is a bull case target that is higher than that. I think it is around 86,000. But certainly, if you look at, say a one-year forward PE multiple for MSCI India, that is trading probably around about 22 times one year forward PE, which is right at the upper end of the historical range.

However, there has rarely been such a good earnings environment as we currently see in India. So, the upside is not as big as it was six or 12 months ago. I think I have been on your show a few times. We have been pretty consistently bullish on India. But remember, we actually expect sort of downside or zero returns for some other parts of emerging markets. So the relative preference is still absolutely there in India’s favour.

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