Date:26/06/2006 URL: http://www.thehindubusinessline.com/2006/06/26/stories/2006062603060200.htm

Back Morgan Stanley Growth Fund reveals `high level of fear'

Nilanjan Dey

Those who hold units of Morgan Stanley Growth Fund have by now seen its latest annual report and chances are that they have not missed the portfolio manager's letter included early on in the document. The letter will interest anyone who wants to know a thing or two about investing, especially with regard to investing in Indian stocks. If you discount the fact that the letter is dated April 26 (that is, well before the Sensex started slipping from its 12,000 points-plus high), you will see that its contents can serve as an eye-opener in many ways.

MSGF, which has made a quick reference to the "high level of fear" that has been prevailing as well as to the 200 per cent and more increase in the past three years, felt greed should have been the more dominant emotion in such a situation. However, there was something that stood in contrast to this argument - the fact that the financial analyst community could not stop worrying about the Indian market's valuation.

More important perhaps is the other case that the fund house has forwarded. This stemmed from the India market trading at a premium relative to its history and to other emerging markets. Considering 12-month forward earnings, the P/E was 17 (this is somewhat different now) compared to a long-term average P/E of 13 and a P/E of 12 for emerging markets as a whole. MSGF managers contended that judging markets in terms of P/E alone was "the simplest yet a terribly misleading" thing to do. So, is the show coming to an end insofar as India is concerned? The end-April view, as suggested by Morgan Stanley, was that emerging scenarios (ours included) did not simply end because the markets were no longer cheap. P/E ratios could become stretched at the peak of a bull run and emerging markets were yet to reach that point.

Let us mention here that MSGF's close-end tenure - it is a 15-year fund - is quickly coming to an end. The letter in question is part of its 12th annual report. As every one familiar with the Indian MF industry will remember, the offer witnessed a sort of frenzy that was not seen before. That was early 1994. Turning back to the letter, here is another interesting point raised in it. Emerging markets, it has been argued, could become more overvalued or even get to the point when it all became a bubble. This happened in 1994, when the P/E of emerging markets vaulted to 30.

Let us end with - how else could it be? - yet another quote from Morgan Stanley's bouquet of arguments. "To be sure, nothing goes up in a straight line. Violent corrections are an integral part of major bull runs and a shakeout in emerging markets may be overdue".

Now, the question is, did that shakeout happen when the Sensex declined sharply (to 9,000 points or so)? Or, are we yet to witness the worst?

Feedback may be sent to nilanjan@thehindu.co.in