Why Morgan Stanley’s Ridham Desai Sees More Room For Rally
The Sensex has risen to a record and is trading higher than its historical valuations. Still, Morgan Stanley’s Ridham Desai says the valuations aren’t expensive and there’s room for growth.
“There’s still a fair bit of scepticism out there. I don’t think people have participated [in the rally],†Desai, managing director and head of Indian equity research at the New York-based investment bank, told BloombergQuint in an interview. “It’s been all too quick and swift.â€
Desai expects growth in the shorter run if the pessimism surrounding the Indian markets subsides. “As far as valuations are concerned, I don’t think the market is rich.â€
The valuations—at 3.2 times the price-to-book value—are neither expensive nor cheap, according to Desai. Investors know that the earnings cycle would turn, he said, but they aren't fully pricing in the “ferocious earnings cycle†that’s expected to kick in over the next five years.
With an increase in the inflow into passive or exchange-traded funds, foreign investors have a reduced exposure in the market than what was seen historically, Desai said. For him, that indicates room for more inflows.
Election Interest Feels Like 2004
Desai also said the general interest in Indian elections, growth prospects and economic agendas is similar to what it was 15 years ago. “This feels like 2004.â€
The markets will correct if India decides to vote in a fragmented government, he said. The ongoing quarter, according to Desai, will be unfavourable due to uncertainty about the general election. A potential upside to global economic environment would hurt India, he said, as that would lead to higher prices of commodities such as crude oil. “India’s correlation with world equities have turned negative.â€
Morgan Stanley expects the global markets to be okay, Desai said, noting that the bank has cut the probability of a recession in the U.S. to 20 percent from 30 percent.
We’re very optimistic on Chinese growth. There has been a fair bit of action by Chinese policymakers to offset the U.S.-China trade tensions, which will cause China’s growth to actually accelerate. If something gets resolved on the U.S.-China trade front, which looks increasingly likely as time passes, we’ll be surprised slyly on the upside with the global growth. It brings a little bit of risk to India, as it gets accompanied by higher commodity prices, notably oil, that does put a lid on India.Ridham Desai, MD, Morgan Stanley
Sector-Wise Outlook
- Expects banks to benefit from the slowdown in lending by non-banking financial companies.
- Sees slow growth in NBFCs, hurt by increased liquidity and lower demand.
- Says now is the time to buy automobile stocks.
- Says only rich valuations are seen in consumer staples.
Watch the full interview here:
Read the edited transcript of the interview here:
Last time, you said that conditions are not conducive for an up move but prices are. It may have been a labored move, but it happened. What’s next?
There is still a fair bit of scepticism out there. I don’t think people have participated. It has all been too quick and swift. There is too much of pessimism from October, November, December and to a lesser extent to January and February. The pessimism is still there in the air. It has not gone away. And therefore, the markets have little bit to go in the short run.
Equities remain a long-term asset class. These things keep happening and they go up and down in the short run. But investors are best advised to just hang on there and create a retirement fund out of equities.
Up until two to three months ago, your top index target would have been 11,500. No one even briefly mentioned re-scaling to previous highs.
We started the year with 42,000 [Sensex target], which looked very outrageous. But the point I was then making was the ballot will fade in importance by the time June comes. So, I was not even making a call on elections. I don’t get into it, because calling election is very hard. My premise was India’s growth cycle is turning. To that extent, the bids will come back to equities at some point in time. It came a little quicker because things changed on the political front. I still feel ballot will fade in importance and what will start to matter at the end of May is how India’s growth pans out, which is looking okay.
The only caveat there is oil and we have to keep an eye on it. Oil is going up for supply side factors and not demand. Supply is dominating and that is not a good thing for India. If oil keeps going up, then it will create little bit of headwind.
While we know that this will be a big liquidity-driven rally, has the retail participant sidelined in up move?
We have $6 billion of issuances ever since the start of the year. Institutional flows on a net basis has been less than that, foreigners and domestic. So, it means that retail is pretty much ahead. Otherwise, you would not be able to do $6 billion of issuances. It is a solid number as compared to last year, coming in the first quarter of this year.
This all has happened quickly in the last one month and almost on a daily basis you have been seeing a big up move coming in.
Flows lag prices. Let’s not think that flows drive shares prices. Prices went up. There is a small lag between flows and prices. So, prices go up, bid comes back and then flows come in. The bid is different from flows. The bid is psychological. The same shares were trading at a 20-percent low price a month ago, and nothing has changed and the prices have, because the psychology has changed. That psychology is about confidence in the future of the company, markets and the economy. That is the combination of various market participants playing in.
I would say retail, high-network has been as involved as foreign investors in the last two months of the move. That is evident in the way broader market has moved. It is not just large cap rally but broad-market based rally. So, psychology is back. Nothing has changed except the psychology, and that is why I have more confidence in India’s future.