Morgan Stanley's Analysis Of Indian Stock Market & Their Top Investment Bets

[00:00:00] Speaker 1: Absolutely. So let's see what comes out of this entire committee that has been set up as well. But moving on from the Morgan Stanley Investor Conference, one of the interesting speakers that we have today with us, Jonathan Garner, Chief Asia and Emerging Market Equity Strategist, who's joining in to talk to us about what he actually thinks of the FI perspective about India et al. and the impact of the West Asia crisis. Jonathan, good morning. Welcome to the show. You know, my question to you is, with India's lowest strategic commodity reserves, which are absolutely relative to China or Japan, at what threshold of global oil prices would you actually consider moving India back to an overweight position because you've recently downgraded India? [00:00:52] Jonathan Garner: Well, the most important thing, as in any call that we make on markets, is what's going on with earnings and what's going on with valuations. I do want to stress that the earnings outlook for India is pretty constructive. We've got around about a 15% EPS growth on a 12-month forward basis. And valuations are a little below 20 times forward P, and that's down from peak multiples. But the issue is not really India, it's what's going on elsewhere, and in North Asia we have completely spectacular earnings growth. For example, in Korea, something like 230% year-on-year earnings growth this year, which I think will be a record for any emerging market. We're probably looking at 30% plus for Taiwan, and again, Japan also very strong. And so what's happening is that on a relative basis, you're getting allocation away from markets like India, and in fact, South Asia more generally, into North Asia. And even though North Asia's outperformed dramatically this year, this will be the second year in a row that Korea is performing very strongly, the forward P multiples are actually in some cases lower than they were at the start of the year because the earnings growth environment just continues to improve. [00:02:06] Speaker 1: Okay, you know, Jonathan, with sticky inflation, with the impact on oil, where do you see the highest risk of EPS contraction happening? [00:02:17] Jonathan Garner: Well, again, it's certainly true that if you look at it across the whole world, a high oil price environment is more negative in aggregate for Asia than it is for Europe or for the US. But again, there's a North Asia versus South Asia thing going on here. Some of the countries that are most negatively impacted by a structurally higher oil price are in South Asia. It's not to say that North Asia doesn't have oil import needs, but there are much bigger strategic reserves of oil and gas in some of the North Asia geographies, and that's helped them be somewhat more resilient so far. But you're right to identify the oil price as a big swing factor. And were the oil price to fall back in the second part of this year, that would certainly be helpful from a balance of payments perspective for India and other countries in South Asia. [00:03:05] Speaker 1: Okay. So, Jonathan, the question then is, with FIs moving out, how are they perceiving India at this point in time? Because that is a concern that India is looking at. [00:03:17] Jonathan Garner: Well, actually, if you look at the FII outflows, they've obviously had to be matched by SIP buying domestically in India. But really, you can date the FII outflows to really the third and fourth quarter of 2024, and then they picked up in 2025 and so far this year. So, it's about a sort of 18 months, maybe going towards two-year phenomenon now. And it's related to my answer to your previous question. It's to do with when some of these structural themes around very strong CapEx in relation to AI, but also defense spending, spending on energy, and other thematics began to become much more central to investor portfolios. And they became much less interested in long-term consumer-centric themes within Asia and things that are more adjacent to the consumer, like the financial sector. And so, in markets like India or indeed Indonesia or market like the Philippines, they're very skewed to consumer and financials. You've had this tendency for foreign capital to be withdrawn. And were you much more skewed to upstream CapEx-related names, which is the case in Korea, Taiwan or Japan, that's where you're getting the strong foreign investor inflow. [00:04:27] Speaker 1: Okay, so that's with regards to investor inflow. Now, the AI tech boom, are they still safe in terms of retail investors? Or are you saying the valuations have become very expensive and risky if someone has to actually look at the AI tech boom and the play around it? [00:04:46] Jonathan Garner: Well, we are talking about semiconductor names in particular and the memory sector, which is exemplified by the two largest market cap stocks in Korea. And more broadly than that, we're finding actually that CPUs are increasingly used in the AI technology innovation sphere. And that creates a much broader array of stocks, particularly in a market like Taiwan, that investors can get engaged with. And I do want to emphasize that as far out as we can see, this likely continues. So, we do have a strong environment, not just for 2026 on this thematic, but through 2027. And it's early 2028 at the earliest when we might see a fade in terms of the growth rates that we're getting in the upstream CapEx sectors related to AI. [00:05:39] Speaker 1: Okay, so that's with regards to where AI goes. Now, overall, if you have to look at investment bets in India and your view on consumption, what would you put your bets on? [00:05:52] Jonathan Garner: Well, we are negative on consumer really across the board. Even in parts of North Asia, the consumer is struggling in the face of the energy shock currently. So, actually, we much prefer capital spending names, of which there are some significant large cap names in India that are oriented to defense spending or energy CapEx, which is ongoing here. The missing piece is the lack of large listed semiconductor stocks, which are just not present in this market. So, anything that's CapEx related is a key thematic for us. Our economist, Upasana Chacha, is talking about India's investment to GDP ratio rising to 37.5%. And it continues to be a very strong story that the public sector has been like enabling of CapEx in general here in India. So, it's finding those names which are relatively limited within the overall index weight to invest in in India whilst being cautious around the consumer financials and the traditional IT services or downstream names that are affected by the energy shock. [00:07:00] Speaker 1: Okay. So, Jonathan, my last question to you then is, if you have to look at what's happening across the globe, West Asia crisis, with the way FIs are behaving, what's happening to emerging markets, what are your key monitorables over the next 6 to 12 months? [00:07:16] Jonathan Garner: Well, it's really about the earnings growth story, which we've already discussed on this interview. So, from the beginning of the year, if you look at the earnings revisions breadth and how that's evolving, it's just continuing to strengthen in industrial semiconductors, memory, upstream energy, to some extent materials, areas like copper, and it's continuing to weaken in all geographies around the consumer. It's quite a significant dispersion in revisions breadth that's happening on a pan-Asian basis, and everything really flows from that in the way that we look at investment. And, you know, the path back for the consumer, it'll be partially driven by what's going on with the oil price, but it's also driven by, you know, by policy and by the underlying sentiments of households themselves in Asia. It's worth remembering that this technological innovation, AI, is essentially driving capital returns, and it's starting to create a situation of uncertainty in relation to the labor force, which is affecting consumer behavior as well. [00:08:26] Speaker 1: Okay, so, you know, I mean, India, that becomes a problem right now in terms of emerging markets as a whole. But thank you, Jonathan, so much for joining in. Always a pleasure to speak to you as well. [00:08:36] Speaker ?: Thank you.