Jonathan Garner explains why Morgan Stanley prefers India despite the steep valuations

India is in a virtuous cycle of strong nominal GDP growth, strong capital inflows, healthy corporate profits, and a more stable environment for investors than ever seen historically, says Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley. "So it is no surprise to us that India is in a persistent secular bull market."

Comparing India with Japan, which is also among Morgan Stanley's top picks, Garner said, India is clearly a costlier market with a return on equity (ROE) of about 16% and a price-to-book ratio (P/B) of four times, against Japan's 10% ROE and a P/B of 1.5.

But despite its high valuations, second only to the United States globally, Garner sees India's market growth more evenly spread across different company sizes, unlike the concentrated profitability in the US. He believes this broad-based growth underpins the confidence in India's ability to sustain significant earnings growth, even at a premium valuation.

"The question for India is how much compounding have we got to go because it is worth paying a growth multiple for a growth stock or a growth market if they're capable of sustaining earnings growth. And at the moment, we have confidence that 20% compounded EPS (earning per share) growth is going to be sustainable for India over a three to five year horizon. So it's a very interesting story," he said.

While India has not yet seen 'true global appeal', Garner pointed out that India's share in the emerging market (EM) index or the Asia ex-Japan index is rising steadily.

Explaining why India has so far not seen inflows similar to those seen in Japan, he said, Japan includes globally recognised stocks that have been familiar to investors for years. Also, the Japanese market in index terms is roughly 3.5-4 times the size of India in free float market cap and it's a developed market (DM). So, it can attract a much broader range of interest. “It's (India is) still an EM specialist or Asia ex-Japan specialist market from a foreigner perspective,” said Garner.

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Garner also shared his view on India's financial sector. “The key point is that the financial sector in India is going to benefit from rising economic activity, rising demand for financial products of all forms and growth in household and corporate leverage over time.”

 

For the entire interview, watch the accompanying video