>INDIA STRATEGY (MORGAN STANLEY)

No Need to Chase Stocks, But Buy the Dips

■ Strategic view is to buy the dips rather than sell the rallies: We think that the October 2008 low may have been the low of the bear market that started in January 2008. Whether a new bull market has begun will partly depend on government’s policy response and partly on global outcomes.

■ Significant medium-term development: We agree with the market’s reaction that the political development is a significant inflexion point for India’s medium term. Over the past 15 months, the electorate has been displaying growing maturity, we believe, in choosing its representatives for the country’s law-making bodies.

■ However, there is no need for panic buying: The market’s bizarre 17% rise yesterday in response to the election results is reminiscent of the 17% intra-day fall in May 2004 in response to the election results then. Just as in May 2004, it did not make sense to panic sell, it
makes no sense to panic buy now.

■ The government’s job is cut out: The government has the challenge to revive growth in a difficult global environment and deal with a large fiscal deficit. We expect the government to stimulate growth and grow out of the fiscal situation. This augurs well for equity markets, though not so well for bond markets.

■ Investor skepticism: Valuations are rich, and paper supply will likely rise in the short run. The market’s performance for the rest of the year depends largely on government action, we believe. We can see why investors are expressing discomfort with this situation. After all, in the past, most governments have failed to deliver. However, in the context of the quality of this government’s mandate, it seems that the market’s optimism may not be misplaced. At the same time, we remain cognizant of the risk of disappointment.


To see full report: INDIA STRATEGY