Inflationary pressures a key concern in emerging markets: Morgan Stanley

File photo of the Bombay Stock Exchange. Morgan Stanley said India, with its expected GDP growth rate at nine percent, would be able to survive all kinds of global turbulences. Photo: Vivek Bendre

Inflationary pressures will be a key concern in emerging markets with a “double-dip” being the major risk they may face, a top Morgan Stanley official said. However, emerging markets such as China and India would be able to survive all kinds of global turbulences, he said.

“We expect emerging markets like India and China to be able to survive all kinds of global turbulences. Currently, India’s GDP growth is seen at nine per cent and that of China at 11 per cent. India has been downgraded to equal-weight from over-weight China. However, the India market is cheap on a relative basis to other emerging markets,” Morgan Stanley’s Managing Director and Chief Asian and Emerging Market Strategist, Jonathan Garner, told reporters here on Thursday.

Presently, the gross domestic product (GDP) forecast in emerging markets is at around 8 per cent.

Mr. Garner said the Chinese market is getting very cheap on a relative basis to the rest of emerging markets and certainly to India.

“We expect that market will do substantially better in the second-half of the year,” he said.

Besides, the global financial services firm screened five Indian companies — Larsen & Toubro, HUL, RIL, Sun Pharmaceuticals and TCS — as the best in their business models framework. These five companies were chosen for their attractive business models, in other words, firms that have a high return on invested capital over the cycle relative to their peers, he said.

On global recession, Mr. Garner said that it would have to be a double-dip back into a global recession.

“However, that is a long way from our forecasts. But if you look at the valuation level that we are at now, it can only be considered to be accurate if one is expecting earnings to collapse in second-half of this year, which is not our forecast.”

Currently, the Eurozone’s GDP forecast stands at one per cent. “Eurozone is the laggard in the global economic recovery, whereas, the US is a self-sustaining one,” he said.

“We think that the market right now is pricing in about negative 15 per cent earnings growth for emerging markets for this year, while we expect something like 40 per cent and the first-half has been strong. The market has got to a point where it is pricing-in economic collapse in the second-half of the year which we think is very unlikely,” Mr. Garner said.