Morgan Stanley Institutional Investor Survey: The Waiting Game

The Indian market is sandwiched between domestic
issues – depressed savings, falling capital productivity
and an election cycle, on one side, and an ever
changing global environment, on the other. Our semi-
annual investor survey of 95 institutional investors
reveals how they are positioned and what they think is
important for Indian equities in the coming months:
 Positioning – Investors turn E-W on India: Only
21% of the investors have an overweight position (vs.
39% in Feb-13) – the lowest level since 2011 and the
lowest since we began this survey. Stock picking is
their preferred portfolio strategy. Only a third of the
polled investors believe that India will beat EM in the
next 12 months – albeit higher than in 2011.
 Waning return and earnings expectations: On
average, investors expect BSE Sensex to be at
20,949 in 12 months, up 2% from current levels. Their
earnings growth expectation for F2014 is 5% vs. 13%
in our February survey and compared to our top down
estimate of 4% and the sell-side consensus number of
10%.

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 Key driver: Almost half the surveyed cited the next
general elections as the most important factor for
India’s performance. One-fifth of them accord
importance to government policies. Strikingly, global
factors such QE and oil are expected to be least
significant in determining market outcomes.
• Financials selected as both the likely best and
worst performing sector for the coming months:
Such divergence in views is a rarity and, to us, it
seems that most money will be made by getting this
call right. We are u/w banks in our model portfolio.
• Mid-caps followed by AAA bonds the preferred
asset classes: However, note that mid-cap equities
have topped the list 7/10 times and it has not quite
worked that way in the past. Real estate is the least
preferred asset class like in Jan-11.
• Key takeaway: The evidence suggests that market
participants pin their hopes on a polarized election
result to swing Indian equities. This implies that the
forthcoming state election results in December could
have a disproportionate impact on equities.