Financial, industrial stocks will do a lot better: Ridham DesaiRidham Desai, the chief India equity strategist at Morgan Stanley, says stocks will be volatile in the near term and that — after the Ridham Desai, Chief India equity strategist, Morgan Stanley |
spectacular run-up this year — further gains will be muted in 2010. In an exclusive interview with ET NOW, Desai identifies financial and industrial stocks as his top picks. He says that equity investors need to carefully watch crude oil prices, IPOs, progress in infrastructure spending, and of course, the speed of monetary tightening. Excerpts: Aren’t you more optimistic on corporate earnings this fiscal than the rest of the Street? Yeah, the next two quarters could be very strong, and that is where
the Street may be missing a point. We are running into a favourable base effect. So, if you look at the run rate in this quarter, I am just extending it to the next two quarters, too. This will give you a broad-market earnings growth of around 25%.
Recently, you wrote that investors were becoming a little complacent about volatility. And suddenly, volatility is back with a vengeance... It looks like it’s going to be volatile near term. Central
banks are going to decide the exit policy, which may generate volatility. But fundamentally, when you plot returns versus expected growth, it appears that the market has already priced in the growth that we are expecting for the next six months. There are two outcomes now: either the
economy and the company deliver the expected growth and markets go nowhere, or they exceed the growth forecast and then markets adjust. If they don’t, then we are getting into choppy waters.
The quality of US growth does appear to be rather weak. What is your view on the kind of risk the anaemic US consumer poses to Indian markets? We don’t think that the US Fed, for example, is going to be in a hurry to pull out the stimulus, because I don’t think there is enough evidence to suggest that growth is back and will stay in the US. Now, we aren’t in the double-dip camp. But many in America believe that we are heading for a double dip in 2010. Our view is that we will get some moderate growth and then we will get some exit from the Fed. India, on the other hand, is experiencing a better quality in growth than it did in the previous cycle.
This time around, the economy is on a very strong footing. I am impressed with the way the government has managed the fiscal policy, which is why we have come out of this quite quickly. And now, we are looking at a potential growth rate of 7-7.5% in the next 12-15 months. Of course, since the US is stuck in a range-bound growth, it will affect India’s growth.
What are some of the key factors that we need to watch out for in predicting the direction of markets? Generally speaking, the market believes that whenever crude oil goes up, it is bad for India; and if that was the case, then the Indian equity market should not have done well over the past 3-4 months. But the Indian market has done well and the reason is that crude oil is not a problem when capital flows are strong. Also, crude oil becomes a problem if you get a very sharp spike in a very short time.
RBI is taking away the punch bowl of low interest rates. Is it going to be a problem? Well, it already has. It’s one of the few
Ridham Desai, Chief India equity strategist, Morgan Stanley |
central banks to have already moved. The central bank’s track record is very good. RBI has conducted itself very well in the past. In 2006, when RBI chose to tighten and ring-fence
banking from real estate, there was criticism that it was stamping out growth and that this was not good for India. But in hindsight, it’s a good thing to do, because it prevented
banks from any problem when the property bubble collapsed. RBI is doing something similar right now. So far, RBI has conducted itself extremely well.
What about the risk that all the infrastructure spending that we are hearing about does not really materialise? We have made tremendous progress in rural infrastructure. We have added about 1.5 lakh kilometres of roads, at a run rate of 100 km a day. It’s a fantastic achievement that has happened. We have managed to get electricity into rural areas. So, NREGA has done some good work and the rural infrastructure is clearly on the upswing. Now, we need to also fix urban infrastructure. Our base case is that we will get enough spending in roads and electricity.
Is more than $20 billion of equity issuances in a year a problem for the market in terms of its absorption capacity? That’s a moving target really, because it is all a function of where we are in terms of liquidity, what happens to global growth, where we get to on exit policy by the Fed and by ECB. So, the India market can absorb around $20-25 billion in the next 12-15 months.
What makes you overweight on consumer-discretionary stocks such as auto? We are still at the early stages of a growth cycle where consumer discretionary tends to do well. If I have to put a pecking order on the sectors, it will be probably financials, industrials, energy and then consumer-discretionary. We are still overweight on all the four sectors, but the pecking order will shift because of the fact that we have already seen a lot of performance from autos and the cycle is now taking off. So, when the cycle is about to start, consumer-discretionary is usually the best sector,
financials follow next.
In the next 12 months, you will see financials and industrials do a lot better; industrials have done well, largely because of hopes of infrastructure spending. In financials, we will go through an expansion in net interest margins. The worst of the non-performing
loan (NPL) cycle is behind us and loan growth will recover quite sharply in 2010. The earnings environment for financials will be good, and in terms of valuations, some of the industrial stocks do look rich.
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Sanjeev Agrawal, Dynamic Research & Management believes that the current rally is a pullback in a wider correction and that stocks could head lower once more.
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