We are bearish on EMs, slightly overweight on India: Jonathan Garner, Morgan Stanley

Jonathan Garner, Chief Strategist Asia & Emerging-Markets, Morgan Stanley, tells ET Now that while India is not the worst positioned in the emerging markets, it is not the best positioned either.

Edited excerpts:

You are still overweight on India within your EM strategy but the big risk is with oil and given where the currency is. that is a double whammy, isn’t it?

We are bearish on emerging markets generally. In 2015, we took our target prices down quite considerably and are forecasting around 5- 6% downside in dollars from the current levels.

But within that, we would expect India to do slightly better though the general environment is quite poor with very large funds outflows. We had a firming of the Fed hike cycle expectations earlier this month. We have had rather disappointing forward-looking growth numbers out of Japan, Europe and north Asia. We obviously have trade protectionism.


You highlighted oil as a risk factor for India but India’s underlying business cycle is a somewhat different position from other economies and it is in a recovery phase. In that respect, we would still be relatively somewhat bullish on India but within a generally bearish view on emerging markets.

What makes you bearish on China? You have downgraded China?

Yes, we have. China is a structural long run outperformer of emerging markets. Its outperformance actually accelerated during the initial phase of declines in emerging markets.

The bilateral tariffs are likely to go into play between US and China is one reason for caution. But we are also seeing quite large reversal of flows through the South Bank connect programmes from Shanghai and Shenzhen into Hong Kong. The Chinese micro data for May was quite weak and the renminbi has started to weaken against the US dollar following some of the weakness we have seen in other EM currencies. But this has been a more recent development in relation to China.

When you say you have an overweight stance on India on a relative basis, do you think Indian markets could give positive returns from here or Indian markets will also fall but they would fall less compared to the other emerging markets?

Yes, that means they will fall by less. That is our view. And if you actually look at the recent performance relative of the Indian markets to global emerging markets that is exactly what is happening so India is not amongst the worst performing markets, it is outperforming slightly but not doing as well as some other markets, but are proving truly defensive like Taiwan, or in the broader Asia region and Australia.

One of the reasons that we turned more constructive on Australia and Taiwan is that they have very high dividend yield support. So, having a strong dividend yields support, strong domestic institutional investor support from the superannuation funds in Australia and the national pension funds in Taiwan are good things to have in an environment where global capital is flowing out of emerging markets at such a rapid rate.

It is interesting that you are overweight on India but you are overweight on India at a time when we are about 12 to 18 months away from the big general elections. Some would argue that this could be a challenging environment for Indian equities in general because of the political overhang?

Yes, so we are overweight India but it is not our largest overweight, it is a small overweight. There are other markets that we are more constructive on in terms of the degree to which we overweight them, including Singapore, Thailand and Taiwan.

The election cycle is an ongoing process in a number of emerging markets; Mexico is holding its very important presidential election this coming weekend. It is always a judgment point as to what moment affects market performance.

The other variable this morning is on emerging markets currencies. For a foreign investor, the equity returns plus the currency returns determine investment decisions. Are EM currencies likely to spiral down further and in that light will the rupee hold?

Yes. We recently raised our forecast for the US dollar to a stronger profile than before against currencies across the board. That means while the Indian rupee along with other emerging currencies, have a downside risk, it is probably not the largest one.

If you look at the external imbalances and sovereign risk characteristics including foreign exchange reserves position, among emerging markets, there are other countries that are more at risk of adjustment compared to India. At the other end of the spectrum, there is Taiwan. Not only does it have dividend yield supporting the equity market but it also has a very large current account surplus with very large sovereign external wealth and no sovereign external debt.

India is not the worst positioned, but it is not the best positioned either.