I got this thing in my mail and it seems to be from Morgan Stanley – and it seems like a pretty negative view of the Indian economy.. something that I have been noticing amongst some commentators. Not that I have a very high opinion of analysts of these firms whose jokers couldn’t differentiate their backsides from their elbows if their life depended on it – which is what the case is with most of these jokers anyways today.
Wanted to share with you so that those in India can benefit from it.
Our bear case on the BSE Sensex (6414) is under threat. There are four reasons for this. Firstly, earnings could be bad: The consensus has revised earnings down and is now expecting 11% and 12% growth for the BSE Sensex constituents on an aggregate for F2009 and F2010 respectively. Earnings estimates are lower from their peak levels (June 2008) by 16% and 22% respectively. However, we think earnings will likely to be a lot weaker.
Based on the developments of the past 2-3 weeks (including the latest data point from Taiwan), our current forecast for F2009 at 9% is being revised down to 7% (Rs910). From this lower F2009 estimate, earnings could fall another 10% in F2010. Thus, we believe earnings for the Sensex could compound annually at -2% versus the current consensus forecast of 12% over F08-10.
Secondly, the macro is challenging. India’s BoP and liquidity situation is making monetary policy less effective. The massive credit growth over the past five years implies that the banking sector could face a sizeable NPL cycle. Interest rates are likely to remain high and growth likely to surprise negatively.
Thirdly, equity valuations have to still adjust on a relative basis. India’s relative P/B is trading at a 65% premium to emerging markets. The absolute P/B has is 15% above all-time lows. At our bear case for the Sensex and using our base case earnings estimate, the Sensex is trading at 8.6 times F2010 earnings, still higher than the trough multiple hit in 2003.
Lastly, Indian equities and its macro need global calm to settle down. Markets remain highly correlated and with the SPX breaking its previous low, Indian equities will find it hard to stay above its October low. The fundamental underpinning to this is how India’s current account deficit and growth are funded – essentially by global financial market flows. Industrials and financials will likely underperform.
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