Morgan Stanley's Ridham Desai says retail flows into Indian stocks can continue

Despite concerns over global slowdown, retail investors in India aren’t likely to retreat unless there was a “very sharp fall” in value of equities, said Ridham Desai, managing director at Morgan Stanley India Company Pvt. Ltd. Indian households remain “dramatically” underweight in the asset class, with stocks comprising only 5%-6% share of their wealth, despite a sharp increase in retail stock trading activity in India over the past few years, he said in an interview with Bloomberg Television.

According to the veteran fund manager, Indian households save roughly 20% of gross domestic product, equivalent to about $700 billion a year and just a tenth of that earmarked for equities would add $70 billion of inflows into stocks and still leave plenty for other asset classes.

Currently, about half of the household balance sheet is in property and 15% in gold, with the precious metal “probably at risk relative to equities,” he said.

Despite record exodus of foreign investors, who have withdrawn about $33 billion from the domestic market the past 10 months, Indian stock markets have been resilient in the face of a global selloff. 

“The combined holdings of domestic mutual funds and direct households in stocks have risen over 720bps since 2015 whereas those of foreign portfolio investors (FPI)have declined about 230bps. The last quarter alone saw a near 90 bps rise in domestic ownership while FPI ownership of our sample of 75 companies fell 84bps QoQ. At 25.6% ownership of India's largest 75 companies, domestic investors are now larger holders than FPIs for the first time since 2010,” Ridham Desai said in a recent note, which he had co-authored with other Morgan Stanley analysts. 

Morgan Stanley is overweight on financials, on domestic cyclicals (Consumer and Industrials) and Technology and underweight all other sectors.

FPIs are overweight on financials and lifted the relative position by 40 bps during the quarter after taking it down for five consecutive quarters. The position is still 540 bps below the peak of Sep-19. The biggest FPI selling happened in Technology where they have gone underweight during the quarter," he said. 

FPIs are also underweight on consumer discretionary and industrials – distinct from our recommendations. While domestic institutions added to Technology during the quarter, they remain underweight. They also added Financials and Consumer Discretionary but are overweight on neither. They are overweight on Communication Services, Consumer Staples and Utilities in divergence from our view. The only sector where we are in sync is Industrials where we recently raised our weight," Desai added. 

With commodity prices coming off their highs, Desai in the interview with Bloomberg TV, said the pressure on margins has eased, which could give companies another lift.

With agency inputs