>India Strategy (MORGAN STANLEY)

A Slow Return To “Normal” Markets

• Markets have been disrupted quite severely over the past few months. We believe the signals from some of the metrics
we track suggest that the market is returning to some sort of normalcy.
• Firstly, return tails, which are still very fat on a 12-month trailing basis, have compressed significantly on a three-month
trailing basis.
• Secondly, we have witnessed some sort of peaking in absolute volatility and relative volatility (to emerging markets) has
come down quite significantly.
• Market valuations and fundamentals (ROE) have also experienced thinning of tails.
• However, the market continues to be dominated by macro. This is most evident in the elevated correlation of returns
from individual stocks (market effect) with the market. Conversely, the average relative volatility of the stocks in our
coverage universe continues to stay at a decade low. The high market effect tells us that individual stocks are being
influenced more by market performance-related factors than by idiosyncratic or non-market performance–related issues.
• In our view, the environment is building up for stock pickers. For one, the correlation of returns between stocks and the
market is unlikely to get much higher. Secondly, valuation dispersion is at an all-time high. Combined with a high ROE
and earnings growth dispersion, the backdrop for stock pickers is actually quite good.

To see full report: India Strategy