The Hindu Business Line : 2008 to be down year for market: Morgan Stanley

Mr Ridham Desai, MD and Co-Head of Morgan Stanley, believes the credit market conditions in the US are still very bad. He expressed his surprise at the recent resilience of US markets. He expects US growth to rebound by the third quarter CY08.

Excerpts from CNBC-TV18’s exclusive interview with Mr Ridham Desai:

Before the Budget, a quick word on what’s going on in the US, we just thought it was stabilising and suddenly, two really bad days coming and hit us; how bad is the situation in the global markets?

The credit markets in America are bad. The equity markets have consistently ignored the signals from the credit markets, so we have had further price falls in the AAA market in America and the equity markets are now waking up to that all of a sudden. So I have been surprised with how resilient the US equity markets have been, and what we have seen over the last couple of days is just a response to a worsening credit market situation in the US.

Where do you think it’s going to head in time from most equity markets? Do you think a lot of the poison is out in the system which is sourcing from the US or we are still on a long road ahead?

That’s a complex question to answer, because I think the key ingredient to the time response will be how successful the Fed is to offset the sentiment and the financial losses in the US, which is how quickly is this monetary response going to work. I think the risk that we run here, albeit small, at this moment of time, is that the monetary response does not actually work. The US is actually going to get massive fiscal stimulus as well in the second half. It’s quite likely that the US growth rebounds in the third quarter sale and that’s our forecast right now. So this US recession fear will be all done and dusted by the end of second quarter.

Your last report indicated the fact that you expect this year to see a reversal in terms of trends PEs, the stocks that had low PEs would now begin to get more attention. The higher PEs would get less attention. In that sense, do you think the Budget has addressed some of those sectors in terms of an impetus to growth?

There is obviously a stellar effort, on part of our Finance Minister to revive consumption growth, which as we are all aware had slipped to almost 0 per cent year-on-year, recently. The credit markets in India or we should say the banks have turned a little more risk-averse. They are not willing to dole out credit for consumption purposes and obviously we needed fiscal stimulus to get this thing going. The point on low PE is actually one for the long-term, which is that if you are a three-five year investor, it makes a lot of sense to focus on. If you are a six-month investor, then sometimes PE doesn’t work, as we have seen in the last six months, high PE stocks did extremely well, but over a here-five year period, low PE stocks do much better than high PE stocks, even in raging bull markets.

This has been a tough year to put your finger on in terms of what the equity markets will do as a performance; what kind of base case scenario are you working with, for India in 2008?

We have to break this up into two parts, the next quarter is going to be rather volatile, and we will pick up cues from the global financial markets. I don’t think we are going to be differentiated from what happens to the rest of the world. India continues to be a high-beta market, and will respond as such, because of the linkages we have through our balance sheet. Our macro-balance sheet is still funded by flows from the US. So that linkage remains.

You have got two scenarios, one base-case of 14,800 and a scary bear case of 11,000 for the Sensex. What are these two scenarios predicated on?

Firstly, the scenarios are predicated on what happens in the US and what happens to inflation in India. So, we have a Budget that has tried to be disinflationary and I think with the excise duty cuts, our estimate is that inflation could come off by 30-40 basis points. It may still not be in the comfort zone of the RBI.

So, we may not get rate cuts. Inflation is one important parameter here. I think that is going to depend on global commodity prices, global food prices, and we are seeing a lot of supply shortages there, and a weird situation where growth is slowing down, but prices are still high because supply is disrupted

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