India down but not out

China beats India in investment stakes, believes Morgan Stanley.

Morgan Stanley said that investors should reduce their holdings in Indian stocks and indicated that Chinese stocks make up the largest “overweight” within the emerging-market model. China stocks are more attractively valued than those in India, while the South Asian nation may tighten monetary policy first, Morgan Stanley strategists led by Jonathan Garner wrote in a report. They also upgraded stocks in Malaysia and Egypt to “overweight” from “equal-weight” and cut Peru and Chile to “underweight” from “equal-weight.”

The MSCI China Index is valued at 17 times estimated earnings, less than the MSCI India Index’s multiple of 21 times, according to data tracked by Bloomberg. The gauges have rallied 56 per cent and 88 per cent respectively this year, compared with a 71 per cent gain in the MSCI Emerging Markets Index.

“This month, within our overweights, we have established a clear preference for China versus India,” said Garner, the brokerage’s chief Asian and emerging market strategist. “China ranks more highly than India on four of the five valuation ratios we monitor.”

China now has a 2.5 per cent “overweight” relative to the MSCI Emerging Markets Index within the Morgan Stanley’s model, while India’s overweight is 0.5 per cent, according to the report. The brokerage also advises investors to hold more shares in Brazil, Taiwan, Israel and Poland than the benchmark index recommends.

Morgan Stanley this week predicted that India’s economy will grow 6.4 per cent in the year ending March 31. Still, the brokerage predicts that India may start reversing its monetary policy in the first quarter of 2010, compared with the third quarter for China.

“This divergence is driven by the relative growth and inflation dynamic in the two countries, as well as the higher relative sensitivity of policy to commodity prices in India,” the analyst said. “As a result, we see an earlier headwind in equities from policy in India than in China.”

Still in a sweet spot
India’s stocks are in a “sweet spot” as profits rebound and may drive the benchmark index 13 per cent higher by the end of next year, says Morgan Stanley.

Earnings for companies in the Bombay Stock Exchange Sensitive Index will gain 15 per cent in the financial year ending March 31, 2010, and 23 per cent in the next 12 months, Morgan Stanley analysts Ridham Desai and Sheela Rathi wrote in a report, increasing earlier estimates of 10 per cent and 20 per cent. Profit growth may boost the Sensex to 19,400 by the end of 2010.

The Sensex, the 10th best performer among 90 benchmark indexes tracked by Bloomberg globally, has rallied 78 per cent this year. Bajaj Auto, India’s second-largest motorcycle maker, said net income more than doubled to a record in the second quarter after it introduced new models and exports surged. HDFC Bank, India’s third-biggest bank by market value, said that second-quarter profit rose 30 per cent.

“Indian equities could be volatile in the near term, since a lot of the next six months’ projected growth is already in the price,” the analysts wrote.

“Investors should use such volatility to buy Indian shares, since the growth outlook for the next 12 to 18 months remains firm and is still not priced into equities.”

Gross domestic product in the year to March may grow 6.4 per cent, higher than an earlier estimate of 5.8 per cent, Morgan Stanley said this week, citing a faster-than-expected recovery in industrial production.

“We reckon that Indian equities could be in a sweet spot with low institutional ownership, strong liquidity, prospects of growth and earnings upgrades, strong corporate balance sheets and stable politics,” the analysts said.