India Strategy Focus: How Much More to Pay? Morgan Stanley Research,

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India Strategy Focus: How Much
More to Pay?
Key Debate: Alleged corruption scandals, rising
inflation threat, higher oil prices, more rate hikes,
prospects of slowing growth, lack of reforms, and
middling valuations are all threatening Indian equities –
this is the argument by equity bears on India.
Our View: The relative scale of damage in the broad
market could mean that a lot of this is in the price.
Certainly, the macro discussion is entertaining and
nerve-racking at the same time. However, investors
must not lose sight of how much could be in the price. To
us, it appears there is enough money on the table in
buying stocks.
The Evidence: One of our colleagues pointed out earlier
this week that the Russell index has hit a life high –
probably one of the few indices in the world to breach its
pre-crisis high (Exhibit 1). This instantly led us to a
comparison with India’s broad market. The contrast is
quite stark. The Indian broad market (using the MSCI
India Small cap index as a proxy) is at multi-year lows on
valuations and performance versus the Russell index
(Exhibit 2 and 3). This is despite significantly better
earnings performance. Indeed, the small cap index
earnings are already at new highs whereas the earnings
for the Russell index are coming close to their pre-crisis
level (Exhibit 4). The MSCI India small cap index has
underperformed the Russell 2000 index by 31% since
November 2010. To us, this underpins how the broad
market could have priced in a heap of bad news.
Conclusion: Bears need to be careful because such a
relative price and performance situation can lead to a
vicious move to the upside to the Indian small cap index
(assuming the Russell does not give up its performance).
We reckon investors could do well to buy individual
stocks.