Global brokerage and research firm Morgan Stanley is bullish on two Indian stocks despite favouring China and Japan instead of the emerging markets such as India. The brokerage has termed both ICICI Bank and Tata Consultancy Services (TCS) shares as “high conviction ideas to own” while featuring them on its Global Emerging Market Focus List. ICICI Bank and TCS shares have outperformed the MSCI emerging markets index since the respective inclusion in the focus list. Morgan Stanley said that the global economy appears headed to its most severe recession in the post-war era but highlighted China and Japan as potential markets that could outperform the emerging markets.
“We think bottom-up analysts are only halfway through adjusting to this reality. With estimates likely to fall further — particularly in non-IT cyclicals — and valuations somewhat rich, we think markets are unlikely to sustain the recent rapid recovery,” Morgan Stanley said in a report. While there is still a 43.6% upside to ICICI Bank’s share price, according to Morgan Stanley’s estimates, TCS has already breached the target price P/E ratio of the stock is estimated to be better in 2020. Among sectors, Indian industrials is one sector where the brokerage firm is overweight.
MSCI EM in trouble but China, Japan favoured
Charting a weaker outlook for the MSCI emerging markets index, Morgan Stanley said that the index could go as low as 650 points, down 29% from the current levels. In the base case, however, the index will fall as far as 800 points or 12% from current levels. The best case would see the index jump 15% to 1,050 points. “Markets that show either rising corporate leverage into 2020 or relatively lower funding strength scores include Argentina, Colombia, South Africa, Turkey, and Thailand. By sector, higher leverage and weaker Altman Z-scores are seen in Transportation, Capital Goods, Utilities, Real Estate, and Telecoms,” the report said.
China and Japan have outperformed the emerging markets year-to-date and the same is expected to continue. Although Japan and China have their idiosyncratic risks such as the US-China trade tensions and Japan’s sector skew to old-economy cyclicals, Morgan Stanley said the secular drivers of both these markets are intact. The brokerage steered clear of the value vs growth stocks debate and recommended investors to remain neutral. “We are neutral Value versus Growth to balance the risk of valuation premia erosion against the fact there is no clear near-term catalyst for reversal. Meanwhile, we prefer Quality given funding risks and the importance of sustainable competitive advantage given unprecedented macro-economic volatility,” it said.
India’s GDP growth to be at ZERO
With the rapid recovery in the global economy that Morgan Stanley is expecting in 2021, helped by unprecedented policy easing and treatment of coronavirus, India is expected to be the fourth fastest-growing economy next year. The Philippines is expected to grow at 12.6% in 2021, followed by Malaysia at 9.6% and China at 9.2%. India’s GDP is estimated to grow at 7.7%, after registering no growth in 2020.