Back up the truck and load it with stocks, says Morgan Stanley

India's equity markets have hit January lows. The economy is in shambles and everything that could have gone wrong, has gone wrong. The rupee is the worst performing currency in Asia. The economic growth has hit a nine year low.

Despite all the gloom and doom, global brokerage firm Morgan Stanley has come out with a report recommending investors to buy equities.

"What we see is that stocks are cheap and that seems like a good reason to start backing up the truck and loading it with equities," the brokerage firm said in its latest India strategy published in June.

"Buy stocks with attractive valuations, reasonable growth prospects, and good management and watch your portfolio grow," Morgan Stanley advised investors.

The brokerage firm said that in 2002-03, the economy looked like it had almost stalled. The investment cycle was dead. Stocks had done nothing but go down for more than three years. Valuations were cheap, but the earnings outlook was fuzzy. It looks quite similar in 2012.
The stock-picking opportunity seems as good as it did in 2003 even as the macro and earnings appear as bad.

Despite dismal forecast in 2003, one thing changed in the subsequent 12 months – a surge of liquidity from the developed markets, which led to better growth and stock prices.

"The prognosis for growth in March 2003 proved too conservative. Fiscal 2004 Sensex earnings growth ended at 24 per cent versus an expectation of 16 per cent at the start of the year," Morgan Stanley said.

The current situation looks no different from 2003 except for these three points, the brokerage firm said.

1) The policy momentum was probably better in 2003. India was privatizing government assets and actually selling government-owned companies with management control. India had just embarked on a new highway construction (the golden quadrilateral). Arguably, we are not seeing such policy force right now.

2) The growth mix is a bit different. There was just one driver of growth in 2003 – the government. The fiscal deficit was higher than today. Both private consumption and investment were muted and, hence, India was running a current account surplus. Wind forward to 2012, India’s growth mix includes strong consumption and, thus, a current account deficit. In 2003, the problem for corporate earnings was that the rupee was appreciating against the US dollar.

3) The starting point of interest rates. In 2003, the long bond yield was already at multi-year lows – inflation seemed within the comfort zone of the RBI. Today, rates are high – whether that is good news or not only time will tell but, for sure, they have more room to fall than in 2003.


So, will history repeat itself and Indian stocks witness the resurgence seen in 2003? Only time will tell.