The US-India relationship will likely continue to thrive under Donald Trump, Morgan Stanley Asia CEO and co-head of global equities Gokul Laroia told Arijit Barman and George Smith Alexander in an interview. Laroia, the only Indian, in the executive committee of the storied Wall Street institution, said recent FPI selling of Indian equities had more to do with growth concerns than the US election. The US firm is also looking to renew its private equity efforts in the country by raising a fresh fund. A company veteran of over 25 years, he was in Mumbai to open Morgan Stanley’s newest global capability centre (GCC) in the country. Edited excerpts:
Q: Donald Trump has talked of imposing tariff barriers on Indian exports to the US. Will these lead to trade disputes?
A: India’s goods trade surplus with the US is small compared to… other trade partners in Asia and so it should be less exposed to tariff risks. The Indo-US relationship will likely continue to strengthen post the election and we see US corporates and institutions committing further investments to India in the months ahead. But we do think that the impact will be less significant compared to 2018-19.
Q: Foreign portfolio investors (FPIs) pulled $10 billion out of Indian equities in October--frothy valuations or something more structural?
A: I think it's a little cyclical. There's no denying that if you take a look at more recent data, it's slowed. But just based on the work we've done, some of that is a function of a slowdown in government spending. That in turn is also cyclicality associated with holidays and festivals as well as rainfall being excessive. So the recent weakness is transitory.
Frankly, if the government was to meet its fiscal budget, spending in the second half of the year is going to grow dramatically. And that should fix a lot of this recent weakness. I agree there has been slightly weaker earnings and the market is pretty fully valued. But India is still super attractive for global investors. They may be taking a few chips off the table to put into China where the big fiscal stimulus should see some uptick. Additionally, China is super cheap and underinvested. We have seen before, when there's no interest in China, India and Japan do really well in Asia. And the reverse is also true.
What's special about India though is the beta to global flows has come down dramatically because the local flows are such a big part of this market. And it was very interesting to see that the SIP (systematic investment plan) flows haven't slowed that much. That’s something unique across Asia. Only in Australia, which has a large homegrown superannuation industry, you see something similar. Outside the US, India is probably the only other example where the savings pool is now getting equitised.
The recent FPI selling has more to do with growth concerns than with US elections. This should abate as (macro) data improves, which we think it will. This should assuage FPIs and selling could recede.
Q: You don't see a deep correction?
A: I really don't see a deep correction. We have seen 7-8% over the last month--I think that's reasonable. But the trendline I think is positive. I really don't see a deep 20-30% correction. The macro variables--fiscal deficit, current account, inflation, leverage, are pretty solid. Are there meaningful excesses in pockets? Maybe, but that is not on a systemic basis. The backdrop for growth and development is actually pretty sound. In India, the average return on equity is about 17%–a 10-or-15-year high. Businesses are actually well run and operate in a very efficient manner with margin expansion over the last couple of years and have been generating returns that are actually world class.
Q: You had a thriving private equity practice in India.
A: We are going to grow. Our private equity business was part of a regional private equity fund. We're now changing that. We are going to drive our private equity effort in Asia out of India. And we see, certainly in Asia, the most significant opportunity in private equity investing being in India.
The fund is going to be principally investing in India with an option to invest in other places. The earlier fund, which we are winding down, was a fund that, frankly, was for the most part a China-led effort, and then invested in other markets, including India.
Q: How big will this fund be?
A: I don't know--it really is a function of how much money we can raise. But the intent would be for it to be a reasonable size. When we do these funds, we'd like to do a minimum of $500 million to $1 billion.
Q: Across pools of global and institutional capital, what's your sense of the investor outlook on India?
A: For private equity, outside of the US, the two main markets for global private equity funds are India and Japan. It’s the same for sovereign wealth funds and they are very focused on putting capital to work over here. The question is not so much how much capital I want to put but how much capital can I deploy at prices that are reasonable. What is also changing is finally India is showing that exits via public markets are possible--75% of our IPO pipeline is PE portfolio companies, so that's pretty special.
In the public markets, there is a passive piece. I think India's weight in global indices like MSCI has gone up and will just continue to go up as market capitalisation and free floats increase. So that will lead to more money coming in. However, discretionary capital will go in and out and will be driven by valuations and relative market opportunities. Frankly, from a regulatory perspective, India is still not the easiest place in the world for a fund to actually operate.
So structurally, there could be improvements over there. And then from a strategic perspective, we've actually seen interest in certain sectors. If you look at various capital pools, I would say 70-80% of the various pools of capital are actually looking to grow their India exposure.
Q: Morgan Stanley now has 15,000 people in the India GCC.
A: We started here about 20 years ago. In the first 10 years, there were 1,500 people. In the next 10 years, we grew that 10x. The key is people in the GCC to support the global businesses. For the global businesses to get confidence in actually putting people over here is a function of ‘I need to try it.’ And if it works, then I'll put in a little bit more. And over the last 10 years or so, the team over here has done a spectacular job of convincing the globe. And there's obviously a cost advantage doing it over here.
We're at 15,000--my guess is that it grows from here. Tough to say by how much and how quickly. But again, it's one of these things that, you know, we could quite easily be at 20,000 in the next several years because not all our businesses are here. We have got a very large technology footprint, operational footprint. The institutional securities business has a decent presence over here.
Our wealth management business globally, which is one of the largest wealth management businesses in the world, is just getting started. So that could be a big number.
Q: Is there a plan to enter wealth management in India?
A: We talk about it. It's something that, you know, at some point I think we might want to do because the market is growing.
I think the opportunity for sure exists. It's something that we would like to do at some point. But at this point, there's no immediate plan. If we ever pursue wealth, it will likely be with a partner. But at this point, it's so early, it's on the drawing board that we just don't have a firm view. It's more bandwidth than anything else that's holding us back.
Q: 2024 is the year of the IPO in India. Will this trend continue? To be sure, the record Hyundai India IPO got a lukewarm retail response.
A: The success of an IPO is a function of the quality of the company and its management, its growth prospects. And if a company checks those boxes, there's a ton of capital that would want to buy it. And then it's a function of how it gets priced, which in turn is linked to where the market is trading. So, all around the world we see when IPOs tend to trade well, and the first day they're up 30, 40, 50%, valuations start going up at the time of pricing an issue. A couple don't work, and it corrects and the next few will be priced more rationally. All financial sponsors who have invested need exits. We have a very healthy deal pipeline and there is a very long list of companies that want to go public. Importantly, the difference this time around, and India is quite sort of unique in that regard, is the IPO rush is sector agnostic. It's not like it's only technology or healthcare companies are tapping the markets. There's a very broad spectrum of names that is actually going to come to market and that is very healthy. When you have just one superhot sector, then once that breaks, the entire market comes to a standstill. We are seeing demand across the board and it's deep.
Q: Donald Trump has talked of imposing tariff barriers on Indian exports to the US. Will these lead to trade disputes?
A: India’s goods trade surplus with the US is small compared to… other trade partners in Asia and so it should be less exposed to tariff risks. The Indo-US relationship will likely continue to strengthen post the election and we see US corporates and institutions committing further investments to India in the months ahead. But we do think that the impact will be less significant compared to 2018-19.
Q: Foreign portfolio investors (FPIs) pulled $10 billion out of Indian equities in October--frothy valuations or something more structural?
A: I think it's a little cyclical. There's no denying that if you take a look at more recent data, it's slowed. But just based on the work we've done, some of that is a function of a slowdown in government spending. That in turn is also cyclicality associated with holidays and festivals as well as rainfall being excessive. So the recent weakness is transitory.
Frankly, if the government was to meet its fiscal budget, spending in the second half of the year is going to grow dramatically. And that should fix a lot of this recent weakness. I agree there has been slightly weaker earnings and the market is pretty fully valued. But India is still super attractive for global investors. They may be taking a few chips off the table to put into China where the big fiscal stimulus should see some uptick. Additionally, China is super cheap and underinvested. We have seen before, when there's no interest in China, India and Japan do really well in Asia. And the reverse is also true.
What's special about India though is the beta to global flows has come down dramatically because the local flows are such a big part of this market. And it was very interesting to see that the SIP (systematic investment plan) flows haven't slowed that much. That’s something unique across Asia. Only in Australia, which has a large homegrown superannuation industry, you see something similar. Outside the US, India is probably the only other example where the savings pool is now getting equitised.
The recent FPI selling has more to do with growth concerns than with US elections. This should abate as (macro) data improves, which we think it will. This should assuage FPIs and selling could recede.
Q: You don't see a deep correction?
A: I really don't see a deep correction. We have seen 7-8% over the last month--I think that's reasonable. But the trendline I think is positive. I really don't see a deep 20-30% correction. The macro variables--fiscal deficit, current account, inflation, leverage, are pretty solid. Are there meaningful excesses in pockets? Maybe, but that is not on a systemic basis. The backdrop for growth and development is actually pretty sound. In India, the average return on equity is about 17%–a 10-or-15-year high. Businesses are actually well run and operate in a very efficient manner with margin expansion over the last couple of years and have been generating returns that are actually world class.
Q: You had a thriving private equity practice in India.
A: We are going to grow. Our private equity business was part of a regional private equity fund. We're now changing that. We are going to drive our private equity effort in Asia out of India. And we see, certainly in Asia, the most significant opportunity in private equity investing being in India.
The fund is going to be principally investing in India with an option to invest in other places. The earlier fund, which we are winding down, was a fund that, frankly, was for the most part a China-led effort, and then invested in other markets, including India.
Q: How big will this fund be?
A: I don't know--it really is a function of how much money we can raise. But the intent would be for it to be a reasonable size. When we do these funds, we'd like to do a minimum of $500 million to $1 billion.
Q: Across pools of global and institutional capital, what's your sense of the investor outlook on India?
A: For private equity, outside of the US, the two main markets for global private equity funds are India and Japan. It’s the same for sovereign wealth funds and they are very focused on putting capital to work over here. The question is not so much how much capital I want to put but how much capital can I deploy at prices that are reasonable. What is also changing is finally India is showing that exits via public markets are possible--75% of our IPO pipeline is PE portfolio companies, so that's pretty special.
In the public markets, there is a passive piece. I think India's weight in global indices like MSCI has gone up and will just continue to go up as market capitalisation and free floats increase. So that will lead to more money coming in. However, discretionary capital will go in and out and will be driven by valuations and relative market opportunities. Frankly, from a regulatory perspective, India is still not the easiest place in the world for a fund to actually operate.
So structurally, there could be improvements over there. And then from a strategic perspective, we've actually seen interest in certain sectors. If you look at various capital pools, I would say 70-80% of the various pools of capital are actually looking to grow their India exposure.
Q: Morgan Stanley now has 15,000 people in the India GCC.
A: We started here about 20 years ago. In the first 10 years, there were 1,500 people. In the next 10 years, we grew that 10x. The key is people in the GCC to support the global businesses. For the global businesses to get confidence in actually putting people over here is a function of ‘I need to try it.’ And if it works, then I'll put in a little bit more. And over the last 10 years or so, the team over here has done a spectacular job of convincing the globe. And there's obviously a cost advantage doing it over here.
We're at 15,000--my guess is that it grows from here. Tough to say by how much and how quickly. But again, it's one of these things that, you know, we could quite easily be at 20,000 in the next several years because not all our businesses are here. We have got a very large technology footprint, operational footprint. The institutional securities business has a decent presence over here.
Our wealth management business globally, which is one of the largest wealth management businesses in the world, is just getting started. So that could be a big number.
Q: Is there a plan to enter wealth management in India?
A: We talk about it. It's something that, you know, at some point I think we might want to do because the market is growing.
I think the opportunity for sure exists. It's something that we would like to do at some point. But at this point, there's no immediate plan. If we ever pursue wealth, it will likely be with a partner. But at this point, it's so early, it's on the drawing board that we just don't have a firm view. It's more bandwidth than anything else that's holding us back.
Q: 2024 is the year of the IPO in India. Will this trend continue? To be sure, the record Hyundai India IPO got a lukewarm retail response.
A: The success of an IPO is a function of the quality of the company and its management, its growth prospects. And if a company checks those boxes, there's a ton of capital that would want to buy it. And then it's a function of how it gets priced, which in turn is linked to where the market is trading. So, all around the world we see when IPOs tend to trade well, and the first day they're up 30, 40, 50%, valuations start going up at the time of pricing an issue. A couple don't work, and it corrects and the next few will be priced more rationally. All financial sponsors who have invested need exits. We have a very healthy deal pipeline and there is a very long list of companies that want to go public. Importantly, the difference this time around, and India is quite sort of unique in that regard, is the IPO rush is sector agnostic. It's not like it's only technology or healthcare companies are tapping the markets. There's a very broad spectrum of names that is actually going to come to market and that is very healthy. When you have just one superhot sector, then once that breaks, the entire market comes to a standstill. We are seeing demand across the board and it's deep.
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