India's strength amid global equity caution will persist: Ridham Desai

Desai says commitment toward fiscal consolidation and push for infrastructure, manufacturing and deep tech will be the key things to watch out for in the Union Budget

“I just hope that we don’t get a bubble too soon. China is struggling to get out of its property bubble. Japan took 35 years to walk out of its equity bubble. Bubbles can be difficult to forecast”

The coalition setup won’t impede the government’s reforms agenda, which is driven by will and intent and not parliamentary majority, says RIDHAM DESAI, chief equity strategist India, Morgan Stanley. In an interview with Samie Modak on the sidelines of the Morgan Stanley India Investment Forum, Desai says commitment towards fiscal consolidation and a push for infrastructure, manufacturing, and deeptech will be the key aspects to watch out for in the Union Budget. Edited excerpts:

We saw a lot of volatility last week. Will markets be stable now?

Investors were a bit nervous on the day of the results, as they thought that running a coalition government might prove to be a problem. But what you’ve seen in terms of evidence over the past few days is not an issue.

This is really a continuation of Modi 2.0. Also, the coalition setup does not really impede much of the economic agenda as it doesn’t require a majority in Parliament. This is more about the will and intent of the leadership of the country.

What to look for in the Union Budget?

We should look for a reiteration of the message in February that the government is heading for strong fiscal consolidation and we’ll borrow less than last year. We’ll get a reaffirmation that that is going to be focus on select infrastructure sectors, like railways, where there’s still more work to be done.

We will get some indications about the government’s commitment to manufacturing. I also think the government will reiterate its commitment to deeptech.

Which themes will benefit from the government’s push?

One is that you want to buy from private sector lenders. They’re going to get strong mid-teen loan growth.

Two, the corporate sector will have space to start investing, which means that industrials will do well. We expect the government to continue to push forward on improving India’s share of global exports. So manufacturing will gain a share of the economy over the next five to 10 years. A plethora of sectors have the focus of the government; it may be in the form of production-linked incentive scheme or goods and services tax rationalisation or faster approvals. These are defence, electronics, food processing, even laboratory-grown diamonds and renewables.

Three, the government will continue to push social infrastructure, which includes getting the poor new homes, water, or toilets or health care facilities.

India’s energy consumption is set to rise quite sharply over the next 10 years. We are going to see a shift in the source of this energy consumption.

Today, the bulk of it is fossil fuel; incrementally, it will be non-fossil; the entire renewable space, and I dare say, nuclear, will get a lot more attention.

Have valuations in some of these sectors — defence, for instance — gone overboard?

Yes, there will always be a few stocks that overreach. Then they’ll correct, and then they’ll give you a fresh opportunity.

We focus on the themes and then get down to stock selection.

On an aggregate market level, the India story is still priced at about halfway through this earnings cycle. Earnings could continue to compound at a rate of 20 per cent over the next four or five years.

Some stocks may be a bit ahead of their earnings outlook; others are lagging behind. So that timing call is best left to how portfolio managers look at it.

Have you set any Sensex targets?

We have a Sensex target of 82,000 for next June. In fact, the Sensex will deliver fewer returns than earnings growth.

Our equity strategists around the world are not very bullish on the equity asset class, and Indian markets don’t operate in isolation. But my base case is that India continues to do well relative to the rest of the world. The absolute number hinges on how the aggregate world markets do, which we are not so constructive on.

Which sectors are you underweight in?

We are typically underweight in global-facing sectors and defensives, as we think local cyclicals will do well.

What are some of the major global headwinds?

There are actually multiple headwinds, which are not just global.

One is, of course, that India does not have the same growth impulse from the world that China had when it was growing, as the world has aged since then and has a lot more debt.

The other conundrum for India is that China has a lot of excess capacity — way beyond its domestic demand. A lot of it will come into the global markets, and India will have to deal with that Chinese pricing pressure. China’s currency will also depreciate, so that will add to the pressure that Indian companies may face as they try to gain share in global exports.

Back home, we still have a lot of supply-side reforms to do. We have done a lot of work on physical and social infrastructure. But there’s work to be done in the judiciary, bureaucracy, health care, education, and farming.

There may be skill shortages as India tries to grow its manufacturing sector. Some of these capacity shortfalls will have to be addressed before India can aspire to lift its potential growth rate. If we are successful in doing that, my growth forecasts will turn out to be quite conservative.

India recently hit the $5 trillion market capitalisation (mcap) milestone. When do you think we will cross $10 trillion?

In our Blue Paper published in November 2022, we projected India’s mcap to cross $10 trillion by 2031. However, at some point, you will get into a bubble because stocks don'’t trade in a linear fashion and markets tend to get ahead of themselves.

I just hope that we don’t get a bubble too soon. China is struggling to get out of its property bubble. Japan took 35 years to walk out of its equity bubble. Bubbles can be difficult to forecast.