We're entering a new multipolar world: Ridham Desai to ETILC members

Until 2020, the world was bipolar. The US was the world’s biggest consumer and China was the world’s biggest producer. In the last several months, this has changed. As per Morgan Stanley, the new world is a multipolar one - where there are multiple prominent producers and consumers and India is one of them.

Going forward, companies will likely move incremental production away from China. If India improves the skill sets of those in the manufacturing sector and further improves ease of doing business it can attract a sizable chunk of this business. However, there are many challenges to overcome as the country has not attracted greenfield projects by multinational companies for many decades.


In a session titled “Bulls Vs Bears - The Eccentricity of The Equity Markets”, Ridham Desai, MD, Morgan Stanley spoke to ETILC members about the state of the economy, the stock markets and larger geopolitical changes that are affecting the world.

As companies are moving away from a model that relied on concentration of production to diversified production centers, supply chains will likely become more secure. This trend, undoubtedly has been accelerated by Covid-19. Large firms that had shut down their warehouses are reopening them as they don’t want higher travel distances for their intermediate or finished goods. “There are some adjustments happening locally and globally and there is a political aspect to these changes but they are not a de-globalization threat,” says Ridham Desai, MD, Morgan Stanley.

Indian Stock Markets, Inflation & Commodity Prices

In order to understand the Indian economy and the stock market one must look back at 2006, just before the 2008 crisis took place. The then government was of the opinion that the kind of rise in profits corporate India was seeing was not entirely desirable and there was a need to increase wages. MNREGA was introduced and wages were increase 3X. By the time the dust settled on the global financial crisis, there was an inflationary pressure on the economy and by 2013 the economy was in deep trouble. Post 2014, the government chose to approach the RBI to fix the inflation problem. The RBI suggested keeping real rates in positive territory to combat inflation. Accordingly, the RBI was made accountable to parliament and there was a mandate to achieve a 4% CPI with a tolerance of plus/minus 2%). It is possible that interest rates were kept higher than required in order to bring down inflation. This along with a host of other factors may have resulted in sub-par growth for India.

The Indian Equity Markets
The stock market’s performance has been subdued for the last decade. In 2020, its performance has made up for the previous 9 years. The stock market is forward looking and thus despite the Covid-19 crisis, it was looking positive, taking into account the government stimulus and future action by both public and private sectors.


Valuing Stocks
As per Ridham Desai, the intrinsic value of equities lies in discounting future dividends. The reason markets are volatile is either because future cash flows or dividends have shifted or the expected return has changed. Another way to look at this is through the lens of the cycle of greed and fear. When one gets greedy one wants lower prices, and share prices go up. When one gets fearful and wants higher prices, the share prices go down. Another practical way of doing this is to understand what the current price implies. From the current share price one can estimate what profit the market is expecting. Basis that one can make a judgment about whether that is reasonable or not.

The Commodity Markets
There is an unprecedented amount of stimulus that’s being pumped into the economy and some of that stimulus is getting routed to real assets and financial assets. This is causing temporary disruptions and thus it is likely that we are in the midst of that. However, the market will adjust as it gets exuberant.

The Value of The Rupee

"What are the views on INR/USD and the outlook on our currency given the overall macro-economic factors - and the implications of the change in INR/USD on the economy/industries?"

— Anuj Poddar

As far as the INR/USD equation goes, the flow side of the equation is very strong and a large amount of capital flows are coming in. An appreciating rupee is not the best thing for growth because it reduces our terms of trade and we lose competitive advantage. The RBI is always interested in making sure that the rupee is not volatile and that the real effective exchange rate should not appreciate. In the INR/USD equation, 50% is a USD call which depends on US policy.

Property

"With the evident boom in WFH and e-commerce, what are the implications for the real estate sector"

— Himanshu Goel

There is a pent up demand in the residential market and the affordability factor has come in. Unlike the share market, the real estate market has micro markets, so the trends are not the same everywhere. By and large there should be an uptick in demand in residential real estate but there could be pockets, where demand dips.

As for WFH, it also is likely to have a positive effect on real estate because people are moving to larger homes in order to work effectively. Also, aggregate demand for commercial real estate will also go up, as not all businesses can operate with people functioning from home - there is a need for team work and collaboration which is best facilitated by a shared work space.

Outlook on Indian Economy
India’s outlook for the next 5 years looks very promising. Provided that India handles the risk of inflation effectively, it can become a $4 trillion economy by 2025. Thes estimated real growth is pegged at 6.5%. The country is set for an investment cycle and is aided by all the PLI schemes and pro-economy policies of the government.