Ridham Desai, MD of Morgan Stanley India, is optimistic about the country’s economic prospects despite the formation of a coalition government in Lok Sabha Election 2024. In an interview with CNBC-TV18, he emphasised that India's political landscape has been shaped by coalition governments since 1989, and the current administration is expected to be stable.
Desai asserts that Prime Minister Narendra Modi's unwavering commitment to structural reforms will drive India’s progress, ensuring macroeconomic stability and supply-side improvements.
Desai notes that consistent domestic investment has been a key driver of the market, leaving little room for foreign investors at present. However, Desai predicts that this dynamic will shift as corporate issuances increase, creating opportunities for foreign investment to re-enter the market.
In terms of investment strategy, Desai advises focusing on domestic cyclicals, including private banks, consumption stocks, and industrials, albeit selectively due to valuation concerns in some sectors. Additionally, he suggests considering IT services as a contrarian investment bet.
Here are the edited excerpts:
Q: Narendra Modi is back as Prime Minister. We have Modi 3.0 loading now. And you're writing in a report that the next decade is going to belong to India. There are a lot of sceptics who believe that this time because it's not just the BJP government and there is an alliance government, there could be some roadblocks?
Desai: I don't think a coalition government will be a roadblock. We got spoilt in 2014 and 2019, but India’s template since 1989 has been of coalition governments. I think this will be a very stable coalition. I see this government working through the next five years. I don't see any shift in policy, macro-stability will be the key focus, along with building the supply side. These are the two things that this government will do. The idea is to take India's potential growth rate from 7% to 8% without triggering any inflation side-effects. This template will be the way the government will work forward.
Q: When you say coalitions have done well in India, do you take example from 1998, 1999, or maybe even 1992?
Desai: We can assuage ourselves by taking all these examples, but every situation is fresh. Those who are sceptical have to be reminded that reforms have to be carried out with the will of the leader and it is not a function of how the government is structured. I don't see any change in the Prime Minister's will to undertake structural reform.
Q: Last decade you had written this report that this is India's 401k moment and domestic money is going to drive the Indian market from here on just like it did in US markets multi-decades back. Now that's come true, do you think that's going to continue, and why are FII's still not buying this market when there's so much visibility?
Desai: There are only two cohorts in the market, there's a domestic investor and there is a foreign investor. Every single day, the domestic investor is putting money to work, so where's the space for the foreign investor to buy? In the market, you need one seller and one buyer. I think the seller will emerge now which is the corporate issuer, so corporates will start raising money and that is how foreigners will get space to buy. I think in the next six months foreign buying will return to India. I think corporate issuances will grow and I see a robust primary issuance cycle because India's investment cycle also is picking up, so a lot of that funding will happen.
Q: In terms of portfolio positioning, then, what do you think you should be going with right now? Mainly domestic economy-oriented stocks?
Desai: Yeah, investors should go with domestic cyclicals. I think the private banks look good, and the consumption stocks across the spectrum look good. I think industrials look good; you have to be a bit selective with them because the valuations may be elevated in some places. And as a contra bet, IT services, I think, continue to look good.
Desai asserts that Prime Minister Narendra Modi's unwavering commitment to structural reforms will drive India’s progress, ensuring macroeconomic stability and supply-side improvements.
Desai notes that consistent domestic investment has been a key driver of the market, leaving little room for foreign investors at present. However, Desai predicts that this dynamic will shift as corporate issuances increase, creating opportunities for foreign investment to re-enter the market.
In terms of investment strategy, Desai advises focusing on domestic cyclicals, including private banks, consumption stocks, and industrials, albeit selectively due to valuation concerns in some sectors. Additionally, he suggests considering IT services as a contrarian investment bet.
Here are the edited excerpts:
Q: Narendra Modi is back as Prime Minister. We have Modi 3.0 loading now. And you're writing in a report that the next decade is going to belong to India. There are a lot of sceptics who believe that this time because it's not just the BJP government and there is an alliance government, there could be some roadblocks?
Desai: I don't think a coalition government will be a roadblock. We got spoilt in 2014 and 2019, but India’s template since 1989 has been of coalition governments. I think this will be a very stable coalition. I see this government working through the next five years. I don't see any shift in policy, macro-stability will be the key focus, along with building the supply side. These are the two things that this government will do. The idea is to take India's potential growth rate from 7% to 8% without triggering any inflation side-effects. This template will be the way the government will work forward.
Q: When you say coalitions have done well in India, do you take example from 1998, 1999, or maybe even 1992?
Desai: We can assuage ourselves by taking all these examples, but every situation is fresh. Those who are sceptical have to be reminded that reforms have to be carried out with the will of the leader and it is not a function of how the government is structured. I don't see any change in the Prime Minister's will to undertake structural reform.
Q: Last decade you had written this report that this is India's 401k moment and domestic money is going to drive the Indian market from here on just like it did in US markets multi-decades back. Now that's come true, do you think that's going to continue, and why are FII's still not buying this market when there's so much visibility?
Desai: There are only two cohorts in the market, there's a domestic investor and there is a foreign investor. Every single day, the domestic investor is putting money to work, so where's the space for the foreign investor to buy? In the market, you need one seller and one buyer. I think the seller will emerge now which is the corporate issuer, so corporates will start raising money and that is how foreigners will get space to buy. I think in the next six months foreign buying will return to India. I think corporate issuances will grow and I see a robust primary issuance cycle because India's investment cycle also is picking up, so a lot of that funding will happen.
Q: In terms of portfolio positioning, then, what do you think you should be going with right now? Mainly domestic economy-oriented stocks?
Desai: Yeah, investors should go with domestic cyclicals. I think the private banks look good, and the consumption stocks across the spectrum look good. I think industrials look good; you have to be a bit selective with them because the valuations may be elevated in some places. And as a contra bet, IT services, I think, continue to look good.
(Edited by : Ajay Vaishnav)
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