Mumbai: Consumer sectors will lead the next bull market, Ridham Desai, managing director and co-head of equities at Morgan Stanley, says in an interview. Edited excerpts:
Market scenario: Morgan Stanley managing director Ridham Desai.
Liquidity is one key premise for any bull market. Do you see conditions right for leading us into a bull market?
We look for four things. One, we look for valuations. This market has clearly passed that test because we did get that low point in valuations early this year in February. So, that test has been passed. Second, you need liquidity. Clearly, that was in place. There is a lot of liquidity in the system. It is sloshing all over the world, including India. You have seen that in flows and in may forms. If you look at commercial banks’ balance sheets, they are as liquid as they have been in the last 15 years and that is very important for the next credit cycle start.
All this talk globally of what happened in 2006 and 2007 in terms of liquidity can never play itself out again; because that was the theme that we heard throughout 2008...
Let’s break it up. Liquidity is the way we measure it in terms of monetary measure.
That flows into equity markets?
That requires risk appetite. Will we get that risk appetite globally? Probably not. I think it will take time for that global scale of risk appetite to come back. Can we get it in specific markets like China and India? I think we can. So, the risk appetite can return to specific segments of risk assets but not necessarily on a global scale, which ranges from commodities to equities from New Zealand to the US. I don’t think that type of scale in risk appetite, we may get back. We have to differentiate between liquidity and risk appetite. The third condition is you need a turn in fundamentals. I think the election result has given that opportunity to us so that we can go back to the potential growth rate, which we reckon is somewhere in the 7-7.5% zone for India. Nine per cent was a growth rate that was achieved because of favourable global conditions. It may take us a while to get back there or it may require tremendous policy initiatives. Neither of them is quite visible as of now, so 7-7.5% is possible. The fourth thing that we always look for is sector leadership and that has not happened as yet. So, we have got the same sectors that were doing well in the previous bull market, and doing poorly in the next bear market as they normally do, are doing well now. I think that will change. If this eventually turns out to be a new bull market, then you will see sector leadership change. My bet is that consumer sectors will lead the next bull market.
Is that enough because we have never had in the recent past a bull market led by consumer staples?
There are a boarder range of sectors that are led by consumption. You have autos, media, education, retail, and even staples. That is all consumption. That is basically not investment-led. I think the investment cycle may lag because there is lot of excess capacity in the world and that is not going away easily not withstanding the rallies that we saw in commodities. There is excess capacity, so if you put the liquidity thing aside, I don’t think that it gives room for more capacity creation immediately. I think corporate India, for example, will take a while to actually get that confidence to put more capacity to work. The consumer is already regaining its?confidence thanks to the package that was done on the fiscal side earlier this year, thanks to the election results. I think he will be the guy who will actually drive this.
Are you convinced in your mind that a new bull run has started or you are looking at some technical pointers from the screen to tell you that now it is a done deal?
No, I am not convinced actually. I am not sure, in fact. It is difficult for me to judge. The reason being that on the one hand I have the global situation, which is quite fragile and threatens to keep coming back to us in a negative way, while at the same time I have a domestic situation, which looks quite encouraging. So, the forces seem equally balanced right now. I cannot be sure whether this is a new bull market. The way I would define it is that basically we get a new high. I can construct a scenario where we can get a new high next year but that is just a scenario and not something that forms my base.
Have there been instances in the past where India has had a bull market but the world has not?
You have to go back to 1991-1992, which was before the opening up of the economy. The Harshad Mehta bull run, as we call it, was the last time when we performed without the context of the emerging global bull markets. We did have one in the mid-1990s, which did not have a global tinge to it, but did have an emerging market tinge to it. If you look at our emerging market view today, it is quite constructive. So, it is quite possible that the emerging world decouples, produces a bull market, and India participates in that, whereas you don’t get a new bull market in the US. In the late 1990s, it was purely a global tech thing. In 2003-2008, it was a global bull market. Ordinarily, the anchoring right now would be that you can’t get a bull market without the global factors. I think it is quite worthwhile to think the opposite, which is we can get a bull market without global factors.
You say that you are not very convinced right now. In 2003, when the markets took off, were you convinced that it was a bull market? How long was it after the rally took off that you were convinced?
It probably takes six-nine months.
Could it be this phase then that you are in the grey zone and the market just moves ahead?
You know the difference between 2003 and today is that you should buy in the dips and that eventually we will get there. I think equity will give decent returns over the next three-four years. In 2003, I cannot claim that I had that confidence. We were still coming out of a very terrible recession in the developed world and it was not very clear that were breaking out. I think here I am much more convinced than in 2003.