Malcolm Wood, Asia-Pacific Equity Strategist of Morgan Stanley says that the Asian markets are seeing domestic liquidity, after the resumption of FII interest.

He adds that higher valuation for Asia is justified since there are concerns about pace and all measures of risk appetite is quite high across Asia and they won''t need a bad news to push the Asian markets further down.

On India, Wood says that there are concerns on the liquidity and the RBI will need to tighten the rates more. He feels that the India valuations are extremely high, which is justified by strong growth.

CNBC-TV18 shares with domain-b its exclusive interview with Wood:

What is behind this optimism in global markets, because it has turned around completely in the last one month, US is at new highs, most Asian markets are at new highs, what do you think has changed in the last 30 days?
From a US perspective, there are a couple of things. One we have had better than expected CPI number last week. A couple of weeks before that, the employment numbers were better than expected. So some of the fears, at least in the short term, about the US have been settled. Besides, more recently, we have had a reasonably constructive reporting season from US companies.

What about Asia though, because Asia has been even stronger?
Exactly. The added feature in Asia is the liquidity that is in our markets; we are certainly seeing lots of domestic interest in equities as well as ongoing or resumption of foreign interest in our markets.

And of course, there is this growing sense that Asia is decoupling from the US, which has helped their markets as well.

Is the case of decoupling getting a little exaggerated or do you think it''s justified given the fundamentals?
I have been a proponent of what I call, a soft decoupling; which is, that US soft landing in Asia would do okay.

However I do think we are getting a little carried away at this point in time.

Asian markets are now trading at the same valuation as the global markets; that is the first time ever and within Asia. Most of the markets with the exception of Taiwan, Thailand and Korea are trading at good premiums to global markets.

So there is a lot built-in now in terms of expectations about the positive outlook.

What is your own sense; is it just a temporary good liquidity kind of spell that you are having after which we will revert to skepticism and profit booking, or do you think the market may surprise this time around and carrying on forming substantially higher highs?
If we look at the medium term, we think that we would head higher. But in the interim, we think there has to be dose of realism here.

The US economy is not out of the woods by a long short. Obviously, sub-prime seems to have come and gone and there are added concerns about capital spending within the US as well as concerns about the impact about the higher gasoline process on the consumer.

So the US isn''t out of the wood. At the same time, valuations are quite high and all the measures of risk appetite are extremely positive at this point in time.

So we don''t think it would take a lot of bad news to push markets down to more realistic levels in our view.

What has changed this whole risk outlook because end-February- starting March, there was a serious re-look at the kind of risk which was on the table, a lot of people seemed to withdraw. And then come April a lot of risk has been put on the table once again - what has changed?
It has been an extraordinarily short period of time. 6-7 weeks only, and we are back to new highs. I think there are a couple of things.

One, Shanghai markets are way above the levels where that 8% correction occurred back in late February.

The second thing is, all those concerns about sub-prime, there hasn''t really been any follow-through day, to concern people.

So at least, at this point in time, investors have concluded that the correction or the pullback that we saw like February-March was a way overdone.

How much of a bearing on this whole risk equation would have come from a) US interest rate outlook and b) the way the yen dollar equation has been moving?
That is what we are concerned about, anunwind of the yen carry trade. I guess some of those concerns have ameliorated. Yen is back towards 120; it is not there.

So I guess that issue''s been somewhat alleviated as well.

And then of course, the Fed made that move to a neutral bias in its policy statement a while back. Perhaps it has backed off that a little bit, which seems to be more concerned about inflation and then. growth. But nonetheless, those two factors have had a more positive bearing on the markets as well.

How do you see this summer progressing then? Do you think there will be more twists along the way; but would you still say that it might get a bit better before any kind of a scare comes back?
It''s very hard to time these things. Our concerns have been, that we would see signs that there are few more problems than the markets are currently discounting.

That could happen in the next month or two. So from that basis; something short-term.

I think we should also remember that protectionism is an issue for this year and the US-Congress will be looking to produce some sorts of legislation media. So that might come on to the agenda as well as we go through next couple of months.

So these are the issues we will need to get through.

Through out the last 12-18 months, there was talk about markets like India getting expensive and then they seemed to have moved, not just spiked to a new high, but moved to a higher valuation band. Do you think despite fundamental concerns, that could be a reality that emerging markets in this part of the world might be moving to a higher valuation band than what we are used to?
Yes we agree with that. That is exactly what''s happened; we have been gradually re-rated, as the US in global markets, have gradually de-rated. And hence, we are roughly at a par now across the region.

I think that''s justified from a fundamental perspective. Asia is in a far better shape than it was ten years ago, from an earnings and profitability perspective and not just inflation, current account surpluses. And looking forward, you have got what we think will be premium GDP and earnings growth in Asia vis-à-vis the developed market.

So we think the re-rating we have seen is by and large justified. But we are concerned about the pace of re-rating in this last period which we think might be getting a little ahead of itself.

What about commodities? Are you seeing signs of liquidity gushing into the commodity markets as well, because they have been rushing to new highs too or close to new highs, how do you explain that?
What we have seen out of China in terms of economic data over the past week, would explain some of the commodity strength that we have seen.

I guess copper has had a couple of specific factors that has been driving the copper price to do with mind disruptions and bit of a short squeeze that seems to have occurred on the futures market there. But nonetheless, the overall commodity space has been resilient which I think has reflected some of the strength that we have seen out of China and Asian economies.

What about India then, it is one of the few markets in Asia which hasn''t yet got back or still needs 7-8 per cent to get to new highs, do you think we would manage that or fundamentals justify that?
As you may recall we are concerned about liquidity conditions in India. We think that the Reserve Bank of India is doing the right thing and will need to do more in terms of tightening policy to ensure that this inflation overheating concerns don''t get out of control in India.

Now that is a headwind that not many other markets in Asia or the rest of the world have to deal with. Of course, India''s valuations are extremely high, justified by the strong growth that we have seen in the past few years.

So if we do see growth really rolling over with these valuations, we think that is a headwind for the market, which we would be more comfortable with at lower levels.

What are you expecting from the Reserve Bank Governor tomorrow then because we have got a monetary policy tomorrow?
That is a 50-50, as to whether he will do something. Obviously, the move couple of weeks ago was a surprise, but we were quite impressed with that.

It is good to see that the Reserve Bank of India is seriously looking to set a real interest rate again in India and looking to cool the economy.
So it is a bit of 50-50 given those moves, as to whether they will move again tomorrow. But if they don''t, that certainly would be leaving no doubt in the investors'' mind that they have got a biased tightening going forward.

We have just about broken into the green this year. To date, India was in the red for most of the last few months and just about got our nose into the green. Do you think we can catch up somewhat because we have been under performing most of the Asian markets this calendar year or do you think it''s a temporary bout of relief that we have had?
India has been a high EBIDTA influenced a lot by global risk appetite. It has had a nice rebound here over the past weeks or two courtesy of that high level of risk appetite that we talked about.

So we can make some assumptions as to whether that risk appetite is going to get higher or not for the reasons like US economic outlook, concerns about the level of risk appetite, concerns about valuation; we probably wouldn''t be backing that in a strong way at this point.

We think that India would probably struggle here in a context of global markets that need to pull back. Having said that, if the global markets continue to head higher, a high-risk appetite would be good news for India.