There's no such thing as EMs any more; Morgan Stanley picks strongest stories including India: Jonathan Garner

Economic Times

3 days ago

Jonathan Garner, MD, Morgan Stanley, anticipates a weakening US dollar, benefiting countries like India with monetary policy autonomy. India's superior earnings growth, compounding at 12% per annum, has driven its outperformance in emerging markets since the COVID-19 pandemic. As India's weight in global equity indices exceeds 2%, global fund managers are compelled to allocate towards the country. Garner further says that the traditional concept of 'emerging markets' is outdated due to the intense rivalry between China and the US, the world's largest economies. The diverse range of countries in terms of economic indicators and policy approaches makes a single 'emerging market' label inaccurate. India stands out as the strongest among these nations.
ADVERTISEMENT What is the chatter about India and all the uncertainties in the world like at the conference?
Jonathan Garner: I was last here in January and at that point there was a debate both here in India and globally about the cyclical slowdown that has been going on in India in the second half of last calendar year. But coming back here for this event, it is very obvious that the economy has picked back up again. We just printed 7.4% in the most recent quarter for GDP and many other micro indicators suggest the economy is picking up. For example, GST revenue being up mid-teens year on year. So, we know that there was easing of monetary and fiscal policy, and it looks like the Indian economy is kind of moving ahead very strongly and it is likely to be by far the strongest GDP growth of the major economies in the world this year.
What about the entire construct for emerging markets? The dollar is weak. Bond yields globally are at 4.5%. Is there enough and more technical and macro factors at play which will drive flows into emerging markets, what is your view there?
Jonathan Garner: I would emphasise that India is quite different from other emerging markets. For example, we do expect China growth to decelerate this year and the US and China engaged in an unprecedented conflict over trade. We also think that, for example, markets like Korea and Taiwan will have a semiconductor cycle to contend with. But there is a group. India is not unique. There are other parts of Latin America and EMEA and Southeast Asia where this dollar weakening that you mentioned is unlocking a quite different cycle from what we have seen in the past.
As portfolio capital is moving away to some extent from the US, we at Morgan Stanley expect the US dollar to be weakening throughout this year. We think on the DXY measure, it will end up below 90 and that produces good things. It gives monetary policy autonomy for example to a country like India. So, the RBI is able to cut interest rates even whilst the Federal Reserve is actually on hold, so that is a key positive feature.
The valuations in India for the longest time are expensive and they are above the mean. But given the growth construct which you just outlined and what Morgan Stanley has been outlining, how long do you think investors or global investors will disregard this?
Jonathan Garner: India has been outperforming other emerging markets quite dramatically for four or five years now really since the height of the COVID pandemic and that is to do with superior earnings growth. It has been able to compound earnings per share MSEI India around 12% per annum, way above other emerging markets. You are not going to buy that economic and earnings performance so cheaply. If you look at dedicated EM funds, even though India's outperformance and the issuance that we have had in primary and secondary mean that its share in the EM index is going up, EM dedicated active fund managers are slightly underweight the market. But I do think there is a bigger story here which is that as India's weight in the global equity indices, the country world indices is now exceeding 2%, truly global fund managers and people who allocate passively on a global basis now have to make an allocation towards India.That is a completely different feature of the market from what we have seen historically where, as your previous question suggested, you are only really talking about India within the context of emerging market fund flows. It is now for the first time really a global equity destination.
ADVERTISEMENT Do you think at a time when there are not just EM funds but global allocations are also upping for India, are valuations for the overall market a concern or any other domestic factors?
Jonathan Garner: From time to time, we have moderated our overweight when we thought that valuations were rich. At the moment, we do not have that view. We are around about 22 times forward PE for MCEI India, roughly the same multiple as the S&P 500, that may seem rich, but actually India's earnings growth is right up there with the best in the world. The key point we make about the Indian financial system at the moment is that bond yields are not volatile. 10-year yields are very well behaved and trending downwards in India and equity market volatility is now well below the average in global equities. The systematic investment plans, the SIPs and other domestic flows drive that. It is just a very strong story and you are not going to buy a strong story like this on low valuations. The market would not be that kind to you to offer this on a low valuation.
ADVERTISEMENT What is the risk for emerging markets as we move from the first half to the second half of the year? Is it tariff, is it valuations?
Jonathan Garner: There really is no such thing as emerging markets anymore. We have written about this really all the way back to our 2018 blue paper on multipolar world dynamics. We are just in a very different situation. We have the world's first and second largest economies, China and the US in a period of intense hegemonic rivalry. We have a whole slew of countries in terms of GDP per capita ranges, macro balance and policy style settings. The old concept of some group of countries that were heading in the same direction and you could put the name on them as being emerging markets, just does not work. If you were to think about emerging markets, then the strongest of them by far is India for the reasons we have already gone through in this interview. We have tended not to recommend allocating to emerging markets. It is rather to pick the strongest stories which obviously include India.
ADVERTISEMENT When it comes to India, the obvious choice and go-to space has always been the large financials. Other than that, because now the markets are also getting deeper, there is more money waiting on the sidelines, where else do you find opportunities within India?
Jonathan Garner: Branded consumer products and industrials are very important and the modern urban lifestyle develops very rapidly here and a very vibrant consumer scene exists and a lot of those new transactions that you see, unfortunately I cannot talk about individual names, but they are taking place in this consumer area which is of significant interest to us. So, we are overweight, essentially financials, industrials, and consumer discretionary.
Just to go back to this piece of allocation. When you look at India positioning versus other markets and when you look at the total flows which have been allocated to individual countries, would you say India positioning is still lower than the global MSCI benchmark or are we right up there? What we are trying to perhaps understand and gauge from you is that is there a lot of space left in the tank for it to get filled up further?
Jonathan Garner: India is our largest recommended overweight. It has been outperforming. Its share in the MSCI EM benchmark is continually rising as also in the global equity benchmark. Within active dedicated EM funds, investors are around 150 basis points underweight, but they are not in the driving seat of price formation anymore.
The market has changed completely. The SIPs, domestic flows and now the arrival of the passive global flows and some active global flows have changed the market structure and dynamics. I really do not think it is that significant where active dedicated EM managers are positioned. It is not of any great relevance.
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