Tag: Morgan Stanley

Rising US yields, geopolitical shifts and RBI’s hawkish stance challenge Indian bonds, says Morgan Stanley

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Chetan Ahya, Chief Asia Economist at Morgan Stanley expects the Reserve Bank of India to begin cutting rates from the second quarter of calendar year 2024.

“We are expecting just about a 50-bps cut. So, it will be a shallow rate-cut cycle,” he told CNBC-TV18.

Ahya also shared his thoughts on the bond market and geopolitical changes in the Middle East.

Bonds and currencies in India and across Asia have encountered unforeseen challenges. The primary concern is the significant increase in US yields, which has surged by approximately 130 basis points since May.

Even though there has been a slight reduction in US yields, recent geopolitical changes in the Middle East have raised fresh concerns about oil prices, which, in turn, affect Asian bonds.

Below is the verbatim transcript of the interview:

Q: We have a plateful over here in terms of issues. But first, let me begin with the US bond yields. This time Asia, according to your report is not going to be impacted much.

A: Yes, that is right. I think the bulk of the rise in real rates that we have seen in the US has been driven by the fact that term premiums have gone up, and market expectations on the Fed policy rate hikes have not been much. So that is one important difference in terms of the rise in the US yields this time.

The second is that Asia’s inflation outlook has been still quite comfortable. We are expecting that Asia is going to see 80% of the region’s central banks having inflation within their comfort zone or closer to target by the end of this month, when you get the data for the September quarter, everybody’s inflation will have looked like it’s within central bank’s comfort zone. So, Asia does not have that big an inflation problem and so usually the way we think about this dynamic when US rates are going up is the fact that whether Asian central banks have their policy setting in a way that the macro stability indicators like inflation and current account balance are in a good position.

And when you try to answer that question, the answer is yes. Most of the countries in the region except for the Philippines have inflation and current account balances in a shape that central banks do not have to take up interest rate hikes.

And so, this is the main thought process behind which we are saying that Asia’s macro stability indicators are in good shape. We do not think central banks have to respond to this rise in US interest rates with higher policy rates.

Q: They may not do it with higher policy rates, but will they have to postpone rate cuts? I mean, can you really cut, say Indian repo rates, if the US yields are still climbing? Never mind even if the Fed has stopped; if the yields are climbing, will that be a bit of a challenge for the currency, and therefore will RBI desist from rate cuts?

A: That is right. We do not think that the central banks in the region will be able to cut interest rates when the US rates are rising up or the dollar is strengthening too much with Fed rate hike expectations going up. That is the reason why we have most of the region’s central banks, which are about to be able to cut rates will be delayed till Q2 of next year. So that is the quarter ending June 2024 because we also expect that by that time Fed would have indirectly or directly indicated that they are not taking up more rate hikes and that they are actually about to cut interest rates.

So, we will need confirmation from the Fed that the Fed is done with this tightening cycle and it’s about to embark on an easing cycle for Asian central banks to also be able to cut rates.

But the reason why we are thinking about some modest rate cuts in the region is that you will have a dynamic where inflation would have decelerated quite a lot and real rates would have been rising. That would be away from the policy stance that various central banks would have is that real rates would have implied that you are tightening monetary policy when it may not have been warranted.

Q: I will come back to Asia and India, but what is Morgan Stanley’s house view on US yields itself? This move in the 10-year from 3.5% in May-June, all the way to 4.85% was quite unexpected. And there has been a kneejerk 20 basis fall. So is a significant retracement expected, or is the medium-term range likely to be towards 5 because there is fiscal oversupply?

A: We are expecting rates to moderate from here and our thought process is that if you break up the 10-year bond yield trends into policy rate expectations and term premium. Both those aspects, we think, will support 10-year bond yield to go lower.

But the most important driver to our lower rates forecast is that the Fed will be cutting rates in the next calendar year by about 75 to 100 basis points. And that is what will create that environment for US 10-year rates to go down.

So, we have been of that view, and you are right, the recent rise was a surprise, and it was not in our forecast. But our US rates team is still maintaining that the trajectory of the 10-year bond yield is downward, closer to four-handle rather than staying at 5%.

Q: Four-handle, that is still a long way if we have to get closer to 4%, but coming back to India, how do you assess the Reserve Bank’s response to the monetary policy? Why would they announce such an important step like an OMO, an open market sale that has pushed up yields considerably? Should that be read as a defense against US yields?

A: Yes, I would think so. I think the way we are seeing various Asian central banks – some of them are explicit like BoK, which mentions the Fed policy path and what is happening to the US rates. And RBI has been sort of more focused on the domestic inflation.

But it’s very clear that somewhere in the back of the mind, the developments in the US rates and the Fed policy outlook are weighing on the RBI’s mind as well, and in an environment where oil prices had been rising, at least at the time when monetary policy decision got taken. They would have to consider the fact that you have a combination of higher US rates, higher dollar, and higher oil prices weighing on the inflation outlook.

So, they didn’t want to sound in any way indicative that they are done, and they are going to cut rates because that will ease financial conditions and that will risk that the currency will depreciate, and I think that’s really the main driver behind RBI’s increased hawkishness.

We do not think that the underlying inflation dynamic in India is right now warranting that shift and hawkishness but it’s the outlook of that inflation affected by this, potential dollar rises, and higher oil is that has weighed on RBI’s mind.

Q: I am not trying to ask you your view on the new geopolitical problem in the Middle East, the Israel-Hamas war, but will Asia have to struggle with higher crude prices? Is that one of your base cases?

A: Right now, our oil analyst is not forecasting oil prices to rise meaningfully. Our forecast is that oil prices will average around $95/bbl in the fourth quarter of this year, and then head towards $85/bbl next year.

So, we are not expecting all prices to go up in our base case. But if it does go up because of these geopolitical tensions, it will definitely complicate the monetary policy management in the region.

And so, in that scenario, while I mentioned our base case, we are not expecting rate highs; in fact, we are expecting rate cuts to be happening, though in a delayed manner. In this risk scenario, where oil prices shoot up, we will see that there is a possibility that some of the central banks may have to pick up a rate hike.

Q: What is your RBI rate cut date?

A: We are forecasting a rate cut in the second quarter of 2024, and we are expecting just about a 50-bps cut. So, it will be a shallow rate-cut cycle.

Q: When you say second quarter you mean second calendar quarter, right? April-May-June?

A: That is right, the April to June quarter.

Q: On growth, the US yields are high, we hear about problems in the commercial real estate and with the 10-year yields, with the term premium also rising is there a chance that US growth and therefore global growth gets impacted. What would your take be for India if the global impulses are going to be weak?

A: First, on the US, we are expecting growth to slow from this quarter itself. There are a few things that are going on in the US. One, real rates are rising, and so monetary policy is gradually tightening. Second, we do not think we will get as much fiscal support and so fiscal impulse is not going to be positive like it was in the last 12 months. Third, there is going to be the student loans, repayment that will burden the consumers. And finally, the excess saving stock for the bottom 20% has exhausted. So, we are expecting consumption slowdown and overall growth slowdown in the US. In the context, this recent real rate rise has only added to that downward pressure because the US economy is funded to a large extent with long tenure borrowing. And therefore, we think that case that we have in our base case that there will be a slowdown is only getting more confirmed. Now, as far as India is concerned, this may not be a bad thing. So as long as the US is slowing, but not going into a deeper recession, it will be good for the region and India in the sense that it takes off this pressure of dollar rise and US higher rates but brings it down into a situation where you don’t have a big downside to exports growth. So soft landing in the US even if it may be a deeper slowdown, it’s fine as long as you do not get a deeper recession.

Q: So, Indian growth, what is your number now?

A: We are at 6.4% for the current financial year. And the next financial year we are at around the same number – 6.5% on an average.

Also, catch all the live updates on markets with CNBC-TV18.com’s blog

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SUV success earns India’s largest passenger car maker its highest target on the street

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Shares of Maruti Suzuki India Ltd., India’s largest manufacturer of passenger cars have opened higher on Friday after brokerage firm Citi gave the stock its highest price target on the street.

Analysts at Citi raised Maruti’s price target to Rs 13,600, while maintaining its buy recommendation on the stock. The revised price target implies a potential upside of nearly 33 percent from Thursday’s closing price.

This optimistic stance is underpinned by several key factors that paint a promising picture for the automaker.

First and foremost, an ‘Improving product mix’, characterized by a higher proportion of utility vehicles (UVs) in Maruti’s product lineup, has been a significant driver of their positive outlook. As consumers increasingly favor UVs, Maruti’s pivot towards these vehicles bodes well for their future earnings.

Citi alluded to Maruti’s success in the SUV segment as it highlighted that the success of the Grand Vitara, the Fronx and steady volumes for the Brezza has insulated the company from the soft demand in entry level cars.

“A year back, a decline in small car sales would have been a big negative for Maruti, with mini and compact cars accounting for 70 percent of the first half of financial year 2023 volumes,” Citi wrote in its note.

However, with its successes in the newer launches, the entry level cars now account for only 57 percent of the financial year 2024 volumes so far.

Another brokerage that is positive on Maruti’s prospects is Morgan Stanley, which has an overweight rating on the stock with a price target of Rs 11,963. Morgan Stanley mentioned that Maruti’s business is turning around as anticipated, and several factors contribute to their optimism.

One significant factor is Maruti’s increasing market share in the SUV segment, which aligns with the broader shift in consumer preferences toward these vehicles. The improvement in the product mix and visible volume recovery are additional factors that are contributing to Maruti’s positive momentum.

The next key trigger identified by Morgan Stanley is the potential for margin expansion. They anticipate the company’s EBITDA margin to grow from 10 percent in the June quarter to 11 percent in the September quarter

To put this into perspective, Maruti’s forward-looking price-to-earnings (P/E) ratio for FY25 stands at 23x, which is considerably lower than the 10-year median 12-Month Forward P/E of 25x.

Shares of Maruti Suzuki are trading 0.9 percent higher at Rs 10,372. The stock has risen 23.4 percent so far in 2023.

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Brokerages slash HDFC Bank’s price target to as low as Rs 1,800

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Brokerage houses have kept target price in between Rs 1,800-Rs 2,300 on HDFC Bank a day after the lender re-appointed Sashidhar Jagdishan as the Managing Director and Chief Executive Officer of the bank. The lender’s shares on Wednesday, September 20, declined nearly 4 percent in early trade on the Bombay Stock Exchange (BSE).

The brokerage firms have weighed in on the lender’s recent developments and mergers, offering both positive and cautionary insights.

Here’s what key brokerage houses said on HDFC Bank:

Nomura

Brokerage firm Nomura has downgraded HDFC Bank’s rating to neutral from its earlier rating of buy. It has cut the price target to Rs 1,800 from Rs 1,970 earlier.

It has cited four negative surprises after the mega HDFC Bank-HDFC merger behind its downgrade.

(1) Net worth adjustments have a negative 4 percent impact on FY24F BVPS (book value per share).

(2) Net interest margin (NIM) cuts of about 25 bps in FY24F and 15-20 bps in FY25-26F on excess liquidity, and accounting adjustments.

(3) Higher cost-to-income due to accounting changes (upfronting of sourcing costs under IGAAP for HDFC versus amortisation under IndAS).

(4) A sharp uptick in non-performing assets (NPA) in HDFC’s corporate loan book.

Bernstein

Bernstein has kept the target price at Rs 2,300 for the lender. The brokerage’s analysis of HDFC Bank further reveals that the addition of excess liquidity is pushing ‘normal’ Return on Assets (RoAs) to FY25.

“However, one-off factors have resulted in an unchanged book value per share. The forecasted normal RoA of the merged entity remains at 1.9-2.0 percent. Nevertheless, there is a slight concern about a marginal worsening of headline asset quality metrics,” it said.

The anticipation of depressed earnings in the next few quarters, due to these one-off factors, has suggested that the normalisation of RoA and subsequent re-rating may take a few quarters longer than initially expected, the brokerage said.

Macquarie

The brokerage has kept the target price at Rs 2,110 while presenting a mixed perspective. It has acknowledged some negative surprises in the merged numbers, highlighting a one-time impact on net worth amounting to 5 percent, though this is attributed to timing differences.

There’s a possibility of missing the near-term 1.9-2.1 percent merged Return on Assets (ROA) guidance. However, hopes are pinned on potential gains from Credila, the education loan unit, the firm said.

CITI

CITI has cut the target price to Rs 2,110 while expressing surprise at e-HDFC’s non-individual non-performing assets (NPAs) rising from 3.7 percent in March 2023 to 6.7 percent in June 2023. Additionally, it has noted a Specific Provision Coverage Ratio (PCR) exceeding 70 percent on HDFC’s NPA, along with a 0.7 percent contingent provision on the overall portfolio.

“There’s a significant rebasing of Net Interest Margins (NIMs) to 2.9 percent for FY23, coupled with further reductions on merger day. These factors have a notable impact on e-HDFC’s March 2023 Ind-AS net worth,” the firm said.

UBS

The brokerage has kept the target price at Rs 1,900, while emphasising the need for clarity on the merged balance sheet and points out a slightly weaker Book Value per Share (BVPS). Accounting and provision adjustments are seen to have reduced net worth accretion, with the creation of a Deferred Tax Liability (DTL) reserve expected to impact capital ratios. The first-quarter Net Interest Margins (NIMs) are anticipated to be influenced by the Indian Corporate Rupee Reserve (ICRR) and excess liquidity, UBS said.

Jefferies

The brokerage has kept the target price at Rs 2,030. It recently hosted an analyst meeting to clarify the transition impact of the merger with HDFC. It has anticipated a slightly higher impact on NIMs due to increased liquidity and ICRR. Reports also suggest that the non-performing loans of HDFC Ltd are currently higher. Despite a 5 percent net worth impact, most of it is categorised as non-cash and transitional, and retail deposit mobilisation remains stable, it said.

Morgan Stanley 

The firm has kept the target price at Rs 2,110. It highlighted lower Book Value per Share (BVPS) and earnings estimates for HDFC Bank. This adjustment is attributed to one-time net worth/PnL adjustments as HDFC transitions from IND-AS to Indian GAAP accounting.

Additionally, lower net interest margins (NIMs) are expected, largely due to the influence of I-CRR/excess liquidity and heightened competitive intensity, the firm said.

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PB Fintech mulls reinsurance market entry amid speculation of insurance sector expansion

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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PB Fintech, known for operating insurance and credit aggregator platforms like PolicyBazaar and PaisaBazaar, on Monday, September 11, issued a clarification regarding its plans in the insurance sector. The company said it had no intentions of becoming a direct insurer or applying for such a license, emphasising its commitment to maintaining a harmonious relationship with existing insurance partners.

The clarification came days after CNBC-TV18 reported that PB Fintech is looking at bringing some significant diversification into its business lines. The report mentioned that the company is exploring options to enter the insurance manufacturing market.

CNBC-TV18’s sources also pointed out that PB Fintech would look to start its reinsurance business by itself without having a foreign or domestic partner and only at a later stage of the business cycle explore the possibility of getting investments from a foreign or an Indian partner in its reinsurance business.

Responding to this, brokerage firm Morgan Stanley said, “The reinsurance market in India could be an interesting opportunity, unlike direct insurance which is a crowded market. PB Fintech has certain advantages in terms of access to significant data and better perspective, being a distributor. However, this is a risk and capital-consuming business, unlike its asset-light and low-risk distribution business; the latter commands much higher valuation multiples. Hence, we will reserve our opinion until there are more details from the company regarding the expected scale of operations, capital investment, etc.”

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Morgan Stanley to launch AI chatbot to woo wealthy clients

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Wealthy clients going to a Morgan Stanley banker to discuss their investments may soon have a different sort of experience: having a chatbot listen to their conversation.

After testing it with 1,000 financial advisers for some months, the bank will roll out a generative artificial intelligence bot this month, developed with the makers of ChatGPT, OpenAI. The details of the program have not yet been reported.

With clients’ permission, the bot will eventually create a meeting summary of the conversation, draft a follow-up email suggesting next steps, update the bank’s sales database, schedule a follow-up appointment, and learn how to help advisers manage clients’ finances on areas such as taxes, retirement savings and inheritances.

Bankers, meanwhile, can use the chatbot to quickly find research or forms instead of sifting through hundreds of thousands of documents.

“The impact (of AI) will be very significant,” potentially comparable to the advent of the internet, said Sal Cucchiara, Morgan Stanley’s chief information officer of wealth and investment management, who is among the executives driving the bank’s push into AI.

Cucchiara, tasked with constantly scanning Silicon Valley for potential tech vendors, met OpenAI executives in 2022, before fast-growing app ChatGPT got mainstream usage.

“It quickly became clear we needed to partner with them, they were far ahead of everybody else,” he said.

Andy Saperstein, Morgan Stanley’s co-president and head of wealth management, then flew to California to discuss a partnership with OpenAI CEO Sam Altman and Boris Power, a technical staff member at the company.

They signed a deal last summer in which Morgan Stanley has preferred access in product development for wealth management. Executives from the two companies celebrated over a dinner hosted by Saperstein, a candidate to become the bank’s next CEO.

OpenAI declined to comment.

While the bot will give insights and administrative support to financial advisers, investment advice will remain the purview of humans.

“The adviser is still at the center,” said Cucchiara. For now, employees view the technology as a helpful tool and aren’t worried that they’ll be replaced by bots, he said.

WEALTH RACE

The AI initiative is part of Morgan Stanley’s strategy to drive its wealth division, where net revenue surged 16 percent to a record in the second quarter and new client assets grew $90 billion.

CEO James Gorman, who has spearheaded a series of major deals that funneled more money into the wealth business, aims to reach $10 trillion in assets under management.

Morgan Stanley is not alone in its AI efforts. While banks already use AI to crunch numbers, detect fraud and analyse customer transactions, Wall Street giants are developing more sophisticated uses of generative AI that is capable of generating text, images and other data.

JPMorgan Chase named Teresa Heitsenrether its chief data and analytics officer in June to lead AI adoption across the largest U.S. lender. Rival Bank of America’s virtual assistant, Erica, has had more than a billion interactions with clients since it was introduced in 2018.

Elsewhere, Moody’s Analytics is also working with OpenAI and Microsoft to develop a research assistant that can be used by clients, said Nick Reed, its chief product officer.

Large banks are the most advanced among financial firms in their adoption of AI, but asset managers, traders and insurers are also deploying it, said Michael Abbott, global banking lead at consulting firm Accenture.

“We’re beginning to see customer services led by artificial intelligence spread among the largest banks,” said Abbott, who is working on hundreds of case studies with lenders looking to use AI.

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India’s greater ascent | Morgan Stanley elevates nation to top portfolio position

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India has not only witnessed positive market dynamics but has also managed to secure the top position in the esteemed portfolio. In an interview with CNBC-TV18, Jonathan Garner, Chief Asia and EM Equity Strategist at Morgan Stanley shared a comprehensive analysis of the current state of the Indian equity market. He spoke at length about the remarkable developments that have taken place, positioning India as a standout performer within the global investment landscape.

Below is the verbatim transcript of Jonathan Garner’s interview with Sonia Shenoy, Prashant Nair & Nigel D’souza on CNBC-TV18.

Nair: Morgan Stanley turned bullish on emerging markets in late October 2022, and it has played out very well; the emerging market index is up some 25 percent since that point on, and now you are changing your assessment of emerging markets and rotating India to the number one market for you. So, I want to start by asking you, what is driving you to do it? Is it just India on its own or is it a more relative kind of call with regard to what you are seeing or not seeing in other markets?

A: Typically, when we get a bull market in Asia and emerging markets, it begins in North Asia in Korea and Taiwan and that is exactly what we saw this time in semiconductors and technology hardware. India has underperformed the rest of Asia and EM in aggregate over the last 9 months as it has been a volatile period of performance relatively. But when we reran our process, it was strongly indicating that taking profits in particular in Taiwan, moving to the sidelines on China, and going underweight Australia, whereas, for India, some of the secular drivers of the market are really falling into place. So, it has moved up now, as you said, to number one in our ranking, and we think it’s time for foreign investors to reengage with the market.

Shenoy: In your report, you also speak about how India has a young demographic profile and that is what supports equity market inflows, which are the sectors or spaces where you see a disproportionate amount of flows come through in India because of this demographic?

A: I would not want to do a sort of one-factor analysis and say it’s only about demography. There are other very attractive features like foreign direct investment and private equity investment that funds capex is very strong as well and India is very advantaged in this multipolar world framework that we use to think about the complex geopolitics that exists today. But on the demographic side, if you look at GDP per capita of about $2,500, that compares to 13,000 in China, and you can certainly play with that demographic theme through consumers and through financials in particular.  And there are other domestic demand plays and that is where we are much more focused than on the export plays. Another key feature of India that we have been talking about in this note is the tendency of the rupee to be far more stable than in the past and to actually appreciate in real effective exchange rate terms versus the currency basket, which is in sharp contrast to the Chinese renminbi that is now structurally starting to depreciate. And so, for a global investor, you do not have to worry so much about the currency as in the past.

D’souza: Going through your note and as you mentioned from October onwards, India has given just single-digit returns while we have some of our peers say China and Taiwan are up more than 30 percent. But still valuation-wise, they are trading at a sharp premium in comparison to the Chinese markets. Do you think this is justified? Do you think Indian markets can further retreat from here on going by the factors that you have mentioned in your report?

A: Yes, so obviously, one’s view and the forward PE depends on your earnings estimates and our colleagues in India and Ridham Desai are more bullish than consensus as we go out over the next couple of years, and India has this track record of compounding earnings now in dollars far faster than EM overall and certainly than China. So, the market is not as expensive, particularly on a relative basis as it was last October, when relate to Taiwan and Korea, it’s probably the most expensive we have ever seen. It’s clearly not at any kind of low valuation, but there are so many positives in the market right now that we suspect investors will be happy with the multiple.

Nair: As you said, for long period of time, India has done much better on a compounded basis. So, it is kind of looks through all the events, etc., and elections are one of them; they come and go, but we have got one coming up and markets will pay attention to it. How are you thinking about it? Do you think that going into it perhaps acts as a bit of a speed breaker or would not be an issue at all? What is your sense?

A: We do not have comments on political processes in any of the countries that we follow. We do observe, of course, policy and the policy framework, and what matters in India’s case for the call that we are making is things like the fiscal deficit, the way that interest rates are managed, whether or not foreign portfolio and FDI investment continue to be very strong that is what we will be monitoring and at the moment it is probably the best I have ever seen in over two decades covering India.

Shenoy: In your India report, you also speak about one of the big risks being a resurgence in commodity prices. And we are seeing that happen as we speak, I mean, crude oil prices have been rising for six straight weeks. Do you think that could be an impediment to the market’s upward move?

A: Yes, certainly that has been a traditional impediment for India. It’s not unique in that regard, most of Asia is oil importing. But our view is that actually, end-use product demand in oil is not that strong right now. So, we doubt that the recent strength is sustained and given the external position India finds itself in a much smaller current account deficit relative to GDP than in the past and much more structural capital inflows from foreign direct investment and private equity. I think it’s extremely unlikely that we get any significant volatility in the rupee arising from this.

D’souza: With regard to the India portfolio; how have you all turned things around, I mean, any kind of stock-specific moves? There was Titan,  Larsen and Toubro (L&T), and I think there was a bit of a rejig there. Could you run us through that?

A: We do not have permission to talk about stocks in this interview, unfortunately, but broadly on the consumer side and on the industrials and financials that is where we would concentrate the portfolio at the moment.

For more details, watch the accompanying video

Also, catch all the live updates on markets with CNBC-TV18.com’s blog

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

India moves up to the top spot in Morgan Stanley’s portfolio, Jonathan Garner explains why

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India has moved up to the top spot in Morgan Stanley’s portfolio after the brokerage upgraded it to overweight last week from its earlier rating of equalweight.

Interestingly, the upgrade came just four months after the earlier upgrade in which the brokerage had upgraded India to equalweight from underweight in March.

In an exclusive interaction with CNBC-TV18, Morgan Stanley’s Chief Asia and EM Equity Strategist Jonathan Garner said that typically, a bull market in Asia and Emerging markets begins with Korea and Taiwan and that’s exactly what happened with the semiconductors and technology hardware market.

“India has underperformed the rest of Asia and EM in aggregate over the last 9 months, it has been a volatile period of performance relative. But when we reran our process, it was strongly indicating taking profits in particular in Taiwan, moving to the sidelines on China, going underweight Australia, whereas for India, some of the secular drivers of the market are really falling into place,” Garner said.

He further added that it is time for foreign investors to re-engage with the Indian market.

Morgan Stanley upgraded India for its secular leadership as it sees a secular trend towards sustained superior EPS growth in USD terms compared to other Emerging Markets and a young demographic, which supports equity inflows.

“Another key feature of India that we have been talking about in this note is the tendency of the rupee to be far more stable than in the past and to actually appreciate in real effective exchange rate terms versus the currency basket, which is in sharp contrast to the Chinese renminbi that is now structurally starting to depreciate,” Garner said.

Indian equity markets had a sharp rally from the lows of March, during which the Nifty 50 gained over 3,000 points and came within 10 points of scaling the 20,000 mark. Although the index has corrected nearly 500 points from the highs, it still remains positive on a year-to-date basis.

“So, the market is not as expensive, particularly on a relative basis as it was last October, when relative to Taiwan and Korea, it’s probably the most expensive we have ever seen,” Garner said. “It’s clearly not at any kind of low valuation, but there are so many positives in the market right now that we suspect investors will be happy with the multiple.”

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India is now an overweight in Morgan Stanley’s portfolio, four months after first upgrade

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Brokerage firm Morgan Stanley has upgraded India to overweight as it believes the country is just at the start of a long wave boom at the same time as China is about to end one.

The upgrade comes just four months after the brokerage had upgraded India to equalweight from underweight on March 31 citing a narrowing valuation premium and a resilient economy.

India has now become the core overweight market for Morgan Stanley within the Asia Pacific Ex-Japan and Emerging Markets basket. India’s valuation premiums to Emerging Markets and China have moderated significantly from last October’s high and are starting to rise again.

“We upgrade India to overweight for secular leadership. We see a secular trend towards sustained superior USD EPS growth versus Emerging Markets over the cycle with a young demographic profile supporting equity inflows,” the note said.

India’s future looks to a significant extent like China’s past, Morgan Stanley’s note said. The brokerage expects China’s GDP growth to be around 3.9 percent at the end of the decade compared to India’s 6.5 percent.

“Our call last October for the beginning of a new bull market in Asia / EM equities is increasingly priced with MSCI EM up 24 percent since the late October trough,” Jonathan Garner of Morgan Stanley wrote in a note.

These are the things that have changed fundamentally in India, according to Morgan Stanley:

• Structural reforms over the last few years which are now bearing fruit
• Unlocking growth opportunities that were previously stagnant
• Supply-side policy reforms like corporate tax cuts and PLI
• Acceleration of infrastructure progress
• Regulation and formalisation of the economy.

Key downside risks for the Indian market includes an upside surprise in inflation and monetary policies, especially if productivity improvement does not catch up. “Another concern is more structural, as AI may be disruptive for India’s services export and the labor fource generally, although we will monitor the impact closely,” Morgan Stanley’s note said.

The brokerage has also upgraded India’s industrials sector to overweight, along with the financials and consumer discretionary stocks, which are already an overweight for them. “We expect these three sectors will be the major beneficiaries of India’s structural story,” the note said.

Within the Asia-Pacific Ex-Japan focus list, Morgan Stanley has added Indian stocks like Larsen & Toubro and Maruti Suzuki, while Titan has been removed from the list. Both L&T and Maruti have also been added to the GEM focus list.

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Hedge funds ‘throwing in towel’ on stocks as rally forces unwind

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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For stock-picking hedge funds coping with 2023’s loopy markets, risks are starting to outweigh the rewards.

Pro managers who make both bullish and bearish equity wagers last week slashed positions on both sides of their book, also known as de-grossing, according to data compiled by JPMorgan Chase & Co.’s prime brokerage unit. The rush to tweak positions was frantic enough to push total client stock flows to the highest level since the retail-fomented short squeeze in 2021.

Morgan Stanley’s hedge fund clients showed a similar pattern of risk reduction, albeit at a slower pace. Their de-grossing activity for the week was the largest this year. At Goldman Sachs Group Inc., fund clients pared positions in 12 of the past 14 sessions.

The retreat may mark a sentiment shift in a market where almost everyone started 2023 defensively before being forced to adjust to the gravity-defying advance. Up in all but two months since October, the S&P 500 has climbed 28% over the stretch, sitting roughly 200 points away from fully erasing 2022’s bear market.

“While the equity rally might be good for those who are long the market, it’s been quite challenging for HF shorts and the rally seems to be inducing broad capitulation in the form of de-grossing,” JPMorgan’s team including John Schlegel wrote in a note titled Throwing in the Towel … De-grossing Accelerates Amidst Busy Earnings Week.

It’s the latest dose of pain that 2023’s rally has inflicted. Rather than sinking like most forecasters predicted, stocks have instead surged as the economy stood up to the Federal Reserve’s aggressive inflation-fighting campaign. Along the way, fast-money managers were compelled to cover shorts and chase gains, while strategists scrambled to raise their year-end price targets for the S&P 500.

With all the negativity in December setting the stage for a rousing advance, the question on everyone’s mind now is whether the sentiment pendulum has swung to the other extreme. Investor positioning has been a better predictor of market direction for most of the year amid economic and policy uncertainty.

One group of early bulls may run out of ammunition, according to Morgan Stanley’s sales and trading team including Christopher Metli. Rules-based funds that make asset allocations based on volatility or trend signals have rushed to snap up stocks, with their net leverage now standing higher than 80% of the time in the past five years, their estimates show.

With exposure elevated, Metli and his colleagues see the risk of systemic macro managers turning into big sellers if turmoil erupts. While they expect the group to produce flat global equity flows in coming days on a net basis, a 5% daily drop in the S&P 500 could lead to $180 billion of share disposal in the following week.

Elsewhere, a sense of caution lingers. Hedge funds saw their net equity exposure slip to 47 percent from 49 percent last week as they continued to take profits in recent winners such as software shares, according to client data from Morgan Stanley.

Eric Boucher, co-head of sales at Renaissance Macro Research LLC, detected similar sentiment.

“I’ve been to a lot of summer lunches and my takeaway is folks still have not positioned for a bull market,” he said. “They’re still concerned about the macro picture,” such as a potential wave of bond defaults should the economy lose its momentum, he added.

That said, this market levitation has lured many to join the party. Retail investors are back with their affection for meme stocks. Options traders are flocking to bullish contracts to play the upside. In a poll by the National Association of Active Investment Managers (NAAIM), equity exposure just increased to the highest since November 2021.

For hedge funds betting against stocks, the blow is getting harder to endure. Long-short funds have experienced nine consecutive days of negative alpha, or below-market returns, the longest period of subpar performance since January 2017, according Goldman data. Scott Rubner, a managing director at the firm who has studied flow of funds for two decades, attributes it to wrong-footed wagers on the short side as well as a deterioration in performance on the long side.

Given the weak market seasonality in August and an upward bias in 10-year bond yields, Rubner is telling clients to either reload on shorts or put on downside hedges.

“I am so bullish, that I am actually bearish now for August. I am looking for a small-ish equity market correction in August,” he wrote in a note. “My core behavioral view is that I no longer speak to any ‘macro’ bears. Positioning and sentiment is no longer Pessimistic, it is Euphoric.”

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Morgan Stanley moves 200 technologists out of China on data law

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Morgan Stanley is shifting more than 200 technology developers out of mainland China after the country tightened access to troves of data stored onshore, according to people familiar with the matter.

The employees, accounting for more than a third of Morgan Stanley’s technologists on the mainland, are primarily moving to Hong Kong and Singapore, one of the people said, asking not to be identified discussing private information. Most of the relocation has been completed, according to the person.

The bank’s staff relocations come as multinationals become increasingly wary of being caught up in Beijing’s crackdown on perceived threats to national security, with tensions growing between the West and China. Authorities have also raided and questioned foreign consulting firms.

The new data regime not only impacts the build-out of technology infrastructure in China for international banks, it makes running their businesses more challenging. Currently, regulators allow data to move across borders, in keeping with the relevant legal requirements and approvals, the people said.

Since China tightened data security further with two new laws in 2021, global firms have focused on information segregation. Many banks and asset managers have created onshore centers to keep China data in the country as part of global operations, adding costs and hindering management of their Chinese businesses, according to the Asia Securities Industry & Financial Markets Association.

ASIFMA, the region’s top lobby group for financial firms, said the increasingly stringent and unclear rules may complicate the operations of international institutions as they’re unable to leverage the benefits of centralized infrastructure.

Tech team

Morgan Stanley had built a sizeable tech team in Shanghai to support its China and global operations, taking advantage of the relatively low-cost base and local talent pool at the time. It also has technology hubs in India and other parts of the world.

To start afresh, the bank will build a stand-alone technology system that over time will be tailored for its futures, derivatives, and asset management businesses on the mainland, the person said.

Goldman Sachs Group Inc. has also been running a separate system for its onshore operations, and doesn’t have global or regional teams in the country. It accelerated its technology build-out over the past two years, putting additional barriers on cross-border information flow to comply with the new laws as it shifted from a joint venture to a 100%-owned entity, people familiar said. A spokesperson at the bank declined to comment.

UBS Group AG has about 600 back-office staff in three locations in China supporting global and China businesses. The Swiss bank also has separate servers to keep its China data onshore, while segregating overseas operations. The lender declined to comment.

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