Fed rate irrelevant for markets, India unmissable for foreign investors, says Jonathan Garner, Morgan Stanley (2024)

Fed rate irrelevant for markets, India unmissable for foreign investors, says Jonathan Garner, Morgan Stanley (1)

It's quite likely in the next three years on the traditional EM index that it will supplant China and be the largest market outright, said Jonathan Garner.

Chief equity strategy for Asia and Emerging Markets at Morgan Stanley says global markets will continue rise and India’s outperformance will continue

Even as the Indian markets have recovered swiftly from the brutal hammering on June 4, there is a strong case for Indian equities to rise this year on the strength of domestic earnings growth. That’s the view from Jonathan Garner, Chief Equity Strategist for Asia and Emerging Markets at Morgan Stanley.

In an exclusive interview with Moneycontrol, Garner explains why Fed rates do not matter for global equity markets and why foreign investors cannot ignore India anymore. Edited excerpts:

Are you surprised by the Fed commentary yesterday? What is your house view?
We think there will be one Fed cut in September. But the Federal Reserve is really not that important for the performance of equity markets, particularly a market like India that's in the middle of a very strong secular bull market driven by strong domestic earnings.

So, is this noise that we can ignore?

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Yes, in fact, I'd rather look at it differently from the way most people do. The whole reason that the Fed is on the sidelines is that the US economy is performing fine. We've got a disinflationary environment, but very strong underlying real economic growth. In particular, a significant AI-related capex is happening, which is very good for productivity.

A Fed on the sidelines just lets normal economic activity carry on. The corporate earnings environment in the US is also very strong in terms of earnings growth. In fact, across most of the world, we have this pattern of strong disinflationary growth. It’s the same in India. It's only China that's struggling economically at the moment.

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So right now, the US markets are at an all-time high and so are a lot of other world markets, including India. Do global equities as a whole see new highs going into this year?

Yes, we are bullish on global equities. And we're particularly bullish in this region on Japan and India, both of which have made new all-time highs this year. India's our largest overweight in emerging markets. We are not bullish everywhere.

We're not bullish on China. We think that rally fades. And we've downgraded some other markets in our coverage earlier this week, including Mexico and Indonesia.

Before elections, there was this huge Buy China-Sell India trade that was playing out triggered by low valuation in Chinese markets. Has this trade played its course?

We disagree with that. We think that India is heading for a fourth year of outperformance of China. The reason is the underlying earnings growth environment here in India is at least 15% dollar EPS growth. Whereas actually for 10 years now, there's been no underlying earnings per share growth in China.

You can get these short-covering low-quality bounces in a market (Chinese market) that's becoming inherently more volatile. But the structural, secular bull market is right here in India.

Emerging markets are trading at 12.5x, India is way higher. Do you think these levels are alluring enough for investors looking at India afresh?

Yeah, it's true India has a higher multiple. But that's very much deserved by the earnings growth. If you look at Indian earnings growth versus overall emerging markets, it's 60 percentage points higher in the last three years. It's quite simply compounding earnings much faster than anywhere else, whereas China is not compounding earnings at all.

And so, the China valuations essentially represent a value trap. It's not a great idea in equities to buy just simply on a low one-year forward P/E or P/B (price-to-book) and not think about future earning streams and ROE. India's ROE is one of the highest in global markets. Only the United States has higher return on equity than India does, whereas China's return on equity has approximately halved in the last decade.

Also Read |India poised to replace China as largest market in EM index: Morgan Stanley's Jonathan Garner

A number of investors argue that single country-specific funds are not that huge and most of the money that comes into India comes through allocations to emerging market funds, in which China has a big weight. And if the Chinese story doesn't look better, then the possibility of allocations to overall emerging markets will not be healthy and that will impact India inevitably. What’s your take on this?

No, I don't agree. It's true that single-country ETFs, let's say for India or Taiwan or Korea, are quite small, versus, say, a single-country ETF for the US or Japan. But there's now a big surge in the issuance of funds that are what you might call EM Ex-China funds or Asia Ex-China funds. You can buy index products that don't have China in them.

The next phase in India's market development is that truly global investors buy India for the first time. Also, in the All Country World Index, the global equity superset that's around $50 trillion, India's now around 2% of that benchmark.

It's basically more than tripled in recent years. And that means that whereas it was within tracking error before to sort of ignore India and other smaller markets, it's now reached the point where global investors have to start buying.

When they come, what do you think they will buy?

The Indian market has now reached a scale that you're going to get truly global investors coming in to look at some of the big stocks here. In the heyday of China, they would typically maybe have two or three China e-commerce internet names in their portfolios, and that's now changed largely. They've now largely departed those names.

So what you'll find is one, two, or three mega-cap India stocks finding their way into global funds. That process has already started, but it will accelerate. From our list, I would say names like ICICI Bank, Maruti Suzuki, Gail, and Godrej in real estate. These are the kinds of stocks that global investors are likely to buy when they look at this market and buy their first stock.

There is also speculation in the market about Korea moving out of the emerging market index into the developed market index, creating more headroom for India’s index weight to go up. Is that a possibility?

No, we think Korea will remain in the EM index for the foreseeable future. But I wouldn't say that that is a barrier to India's gaining share. The outperformance of the market is so profound that actually India is already the second largest market in the overall EM index.

It's quite likely in the next three years on the traditional EM index that it will supplant China and be the largest market outright.

Also Read |Jonathan Garner of Morgan Stanley: India to emerge as FII's darling; bullish on ICICI Bank, Maruti, and more

Where do you see pockets of growth in Indian markets? And where do you see pockets of weaknesses?
We like domestic demand plays. Consumer discretionary, industrials, financials, and real estate, which is a sector that we didn't really recommend earlier but is now actually reaching liftoff. We're more cautious on externally-earning sectors like IT services, outsourcing names, pharma names, and obviously on defensives. We're not in a defensive posture on India.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Fed rate irrelevant for markets, India unmissable for foreign investors, says Jonathan Garner, Morgan Stanley (2024)


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