In a report Morgan Stanley disagrees with the current rally in the Indian market. It appears that investors are starting to build a bull case for India. In agreement with India’s long-term story is intact but we do not see a reason to buy Indian equities at least until the elections. Recently developments in politics seem to be increasing the probability of very fragmented parliament, which could spoil chances for a post election recovery in markets as well with a likely downgrade of sovereign rating.
The Indian Financial / Banking sector is likely to have 6% non-performing loans. It is possible things turn for the worse. In that context, foreign investors still own over 30% of their portfolios in financials and are seemingly overweight.
Indian companies have built cost structures for 8-9% GDP growth. With growth likely to be 6% or less, a major cost-cutting initiative is needed to prevent a collapse in earnings. The pace and extent of corporate sector operational de-leveraging will likely determine how much earnings could fall. We expect broad market earnings to fall by 25% in F2010 with risks to the downside depending on global growth and election results.
Finally, a bad election result could therefore trigger a rating downgrade given the fiscal position and lead to further pressure on the currency.
Morgan is of the view to SELL the rally. We are not sure of SELL but don’t BUY yet or selectively 10% of your investment capacity as bargain hunting 🙂