Mumbai: In the absence of any cues from the US amid concerns over the debt crisis in Europe, Indian stock markets seem to have entered a consolidation zone. Morgan Stanley India’s managing director Ridham Desai takes a long-term view of Indian equity markets. “We think in India equities could be the best asset class over the next 10 years, followed by property,” he says in an interview. Edited excerpts:
Do you get the sense that investors are now approaching India with a different mindset than the one they had when they approached India in 2008, when it got slammed with every other market? Is there a realization now that this market is one you should be buying in when there are dips because of external events?
Indeed, I think what has happened in the past one month has surprised me because if I were told that there was going to be such a big problem in the month of May, I would have argued that India would have suffered a lot more than what it eventually suffered.
Bullish outlook: Ridham Desai of Morgan Stanley India.
So India’s relatively defensive response has come as a pleasant surprise. I think it probably boils down to a few factors which are going in India’s favour. I think we have got a very steady policy response from the government, we have got a hike in fertilizer prices, we got the hike in gas prices, we got bumper 3G (third generation) auction proceeds, so it seems like there is something happening there.
The central bank has been particularly vigilant, is ready to act to curb inflation expectations, so I think the market is getting rewarded for that. Also, we have got a very strong corporate performance, earnings in this season have come in quite good, with two of three companies surprising on the upside. So I think these are the factors that have helped India sustain a defensive performance... I do not see these factors going away for the rest of the year. So while there could be some absolute declines along the way as things settle down in Europe, my view is that India should do relatively better and those should represent buying opportunities for investors with a 12-18-month outlook.
You saw fairly encouraging GDP (gross domestic product) numbers yesterday (Monday); do you think even if growth weakens in Europe and does not remain particularly buoyant in the US, we can still continue to grow between 8% and 8.5%?
I think there are two things. First is that we have benefited from a trough in the previous 12-month period so the recovery was in the nature of a V shape. That V-shape recovery is behind us. So, incrementally, I don’t expect growth to accelerate from here. I think growth will remain at around 8-8.5%. People who are looking for growth to accelerate to 9% or 10% may get disappointed.
Will the external environment affect us? Yes, of course, it will to the extent that it influences capital flows into India. India needs about $50-60 billion of capital flows annually to sustain its growth rate. So to the extent that it influences these capital flows there could be some impact on the growth rates. So we will have to see how it pans out.
What about the other big macro variable, which was top of mind, ahead of growth at the start of the year, inflation and interest rates? Do you think in a perverse way that has cooled down because of what is happening globally, may be interest rates will go up at a more measured pace, may be inflation is not such a sticky problem any longer?
I think one of the good things from the European crises is that India’s inflation is a slightly lesser problem. Crude oil prices have come off... I think we are looking at normal monsoons, so that’s again a base case scenario, so food inflation also should come off a bit.
So inflation may be less of a worry compared to two months ago. The rate path will be more moderate than what most of us could have thought at the start of the year.
But in India, can we continue to have a multi-year bull market even if the world is flat?
I think that is plausible. Our models indicate that India could deliver somewhere close to mid-double-digit returns over the next 10 years. So there is a lot of risk premium that India is offering over the returns in the developed world and to that extent investors will continue to raise their portfolio weightings in India.
I would add to that that we think in India equities could be the best asset class over the next 10 years, followed by property, versus over the last 10 years when gold had done very well and on a risk-adjusted basis (the performance of) equities was not so good.
What is your bull case scenario for the Sensex this year?
This year we are looking for an outcome of around another 10-15% return for the remainder of the six months that are coming up.
Given your earnings outlook for 2011, that is next calendar, do you think we could be looking at a new high?
I think that’s possible. I think previously we were looking at a new high in 2011, I would stick with that view. I think it’s quite possible that we get there... The earnings for the broad markets have already passed their previous peak.
The markets are still around 30-40% below their previous peak. So the derating that has happened over the past couple of years has been quite intense and I expect a part of that to reverse as we go in 2011.