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Malcolm Wood of Morgan Stanley has a view that there has been aggressive FII selling across emerging markets as FIIs continue to be cautious about global economic situation. Speaking to CNBC-TV18, he says that the medium term outlook for Indian markets still looks strong.

Excerpts from the exclusive interview with Malcom Wood:

Q: What’s the sense that you have of emerging markets right now after speaking to so many investors, are people still running scared or is confidence beginning to claw back?

A: Investors are running scared. There has certainly been a big shift towards risk aversion and India has been a victim of that trend in the past few weeks. At this stage, it’s probably a little bit too early to see investor confidence though we do think that there are buying opportunities emerging in Asia at this point of time.

Q: What do you expect to see with global flows, USD 5 million to USD 6 million have gone out of the region, do you expect this to continue or you think we have put the worst of FII outflows behind us for India as a market?

A: There have certainly been some aggressive outflows not just in India but also across the region which was the most aggressive selling in any of the corrections over the past 4 years in Asia. So international investors whether it is hedge funds, or long term investors have certainly raised quite a bit of cash leverage, so we think all of that damage is being done, of course if things continue to deteriorate in the global and home markets, it would still be a stretch to expect them to be big buys that have certainly taken out some of the new investments.

Q: What’s your take on what’s going on in the primary markets in India, do you see similar trends across Asia and do you think there is more by way of unwinding that needs to happen in these sectors particularly?

A: There is no doubt that a lot of primary deals would be postponed or withdrawn across the region, this sort of thing has happened in India, China and those are the two key primary markets across the region over the last one or two years. So we have seen normal investor reaction where we have seen sort of market correction. Now that the primary calendar is certainly short and dried up, I would say that with the correction largely done, it would take a probably bit of a recovery in the market before we see the IPO process restart.

Q: What’s your own take on Reliance Power, Where does the stock goes from here and over all valuations from the power sector after the savage fall that those stocks have seen?

A: The power sector is part of the broad infrastructure thematic for India, and obviously the concept of substantial increases in generating capacity in India is a great one, so it’s the question of what price you pay for that, we certainly have felt that the valuations were quite extreme. We would be looking at the sector again since it has got back to more realistic levels. Broadly speaking, if you look across the region, China is already spending massive on infrastructure; the two countries which offer the best opportunity now are India and Indonesia.

Q: Just talking in general about emerging markets and Asian markets, what is the easy call for you to make, a pullback rally from here or stocks going back to test the lows of January?

A: It is obviously easy at this point in time with markets so volatile as you have pointed out. But our sense is that on a 6-12 month horizon, this is a good buying opportunity. We think that valuations have come back to below average levels and liquidity conditions are improving because of an aggressive Federal Reserve, which we think will be joined by some other major central banks. Earnings expectations in Asia in particular are reasonable. We think that 9% earnings growth is very doable in the environment we envisage.

So, we think this represents reasonable buying opportunity but it is going to be volatile. As you have mentioned, there are concerns about the US economic downturn and investor participation in the market, IPOs et cetera. So, we are seeing this up and down pattern. But we think through this noise, there will be good returns.

Q: What about India? It was outperforming most other markets for the better part of 2007 and now we seem to be underperforming. There is complete apathy out here. Do you see India continuing its underperformance relative to its peer set?

A: We like India to look a little bit more attractive in terms of relative valuation in particular. It still does stick out to us as the most expensive market in Asia. We also would like to see signs that the RBI is going to cut rates. Earnings expectations are also to our mind just a little bit high. So, there are a few things we would like to see before we would confidently point to outperformance in the Indian market.

But as you pointed out, this has been a fantastic market. The Indian economy has performed very well. The medium-term outlook still looks pretty strong. So, we don’t think India will be a dramatic underperformer from here.

Q: Do you think there is downside to the Indian market; do we go back to retest January lows or lower than that? What is your own assessment looking at valuations and technicals right now for India?

A: On the valuations front, the forward P/E on our numbers has come back to about 18 times. Put that in context, the regional markets on just over 13 times, so India has come down. But everybody else has come down as well. So, we’d like to see that gap narrow. I am not too sure if that means India has to go down or the regional markets will be outperforming on the way up. But I do think that we need to see a bit of better relative value reestablished. From a technical perspective, investor sentiment is quite cautious at this point in time. What could be a catalyst that would change that? I think something like a RBI rate cut in India or signs that growth is holding up extremely well would the two catalysts.

Source: Moneycontrol.com