Sanjay Shah, Co-Country Head & Co-Head of Indian Equity Business, Morgan Stanley speaking to CNBC-TV18 from the sideline of the conference said although the market may witness volatility in the near-term, the long-term India story still remains very strong.
The focus of the conference, he says has been more on the long-term growth than just the market per se. With the government trying to put the building blocks for long-term sustainable growth, it makes for an exciting story and that is what both the domestic and international investors are focused on.
The volatility likely to be witnessed in the near-term could be because of an unusual and synchronized rise in global equities, bonds, gold and even bitcoins.
The risk or challenge if any for the Indian market could be from a global perspective because currently volatility is low everywhere. Second could be implementation of GST which could cause short-term disruption, says Shah. Also the valuations are not cheap but against the background of broader market revenue growth starting to accelerate, people are willing to take that in their stride, says Shah.
However, he says FIIs are willing to put more money into India but the supply of paper is less. “The amount of money that we can absorb in the country depends on our ability to increase the market cap and float in the market – that requires more paper into the market, more IPOs, more sponsor selling to happen.”
Talking about yesterday’s RBI monetary policy and the rate hike trajectory for India, he says with the US Federal Reserve likely to raise rates two times this year and another four rate hikes in 2018 -- against that backdrop it is unlikely that RBI will cut rates. In fact, it is more likely that they would raise rates in the second half of 2018. This is also driven by the fact that the economy is stabilising and growth is likely to gather more momentum.
However, he does not think rate hikes by RBI will be deterrent to growth because the economy is entering into a sweet spot where the corporate performance and growth is seen improving.
Below is the verbatim transcript of the interview.
Q: What did you make of the RBI policy?
A: In terms of the inflation outlook, it is more or less in-line with our expectation because we did not expect and we don’t expect the Reserve Bank of India (RBI) to cut. I think the core inflation does remain a little bit sticky and that obviously to the RBI is not a concern.
More importantly I think we have to read between the lines. The focus on trying to reduce SLR on a consistent basis and selective relaxation for example risk weights in mortgage finance and the loan to finance ratio does indicate that there are areas and pockets in which the RBI and the government need to focus and want to focus and that is something that we need to take away.
Q: At the house level do you expect any rate cuts by the end of this year?
A: I think just to take a step back, our view is that we will have two more rate hikes in the US this year and another four rates hikes.
Q: In 2018?
A: In 2018. Against that backdrop, we don’t expect the RBI to cut rates. If anything, at some point in the second half of 2018 we would expect an increase in rates partly also driven by the fact that economy is stabilising and we should see the economic growth gather more momentum.
We don’t think that is going to be deterrent growth though because I think we are entering into a more or less a sweet spot in the economy where even corporate performance is improving, the growth is improving. So, we believe that it will be more of a rate increase next year than anything else.
Q: Coming to the conference now, I spoke to your colleagues as well over the last two days, whether it is Ridham Desai, Jonathan Garner, Chetan Ahya, and everybody seems to be bullish on India. You talk to a lot of your foreign institutional investor (FII) clients, is that a view shared by your clients as well?
A: Strangely we have not really spoken too much about the market this time. I think the entire focus of the conference this year was to take the narrative away from near term views and focus on the markets to the longer term story. I think that is what we have been trying to do over the last two or three years because what the Modi government is trying to do is put in place the building blocks for a more longer term sustainable growth and against the face of that I think we are going to continue to see some cycles in the market, ups and downs, but when you really think about what they are trying to do, it makes for a very exciting story.
I think that is what the investors are focusing on and that has really been the content of the conference, actually been the focus of the conference. Near term there could be volatility because I think we are seeing a very unusual and a very synchronous rise in global bonds, global equities, and even gold and last but not the least even bitcoins. So, I think this is a little bit unusual when you have such a global synchronous rally in number of other asset classes with volatility remaining low and that does cause you to be a little bit concerned. However, the leave the near term consensus aside, the longer term story continues to remain very strong.
Q: I believe which is why Ridham Desai believes in next five years India can have 3x return in terms of Nifty. That has probably been said a lot in the last couple of days. From an India point of view, market is at all-time highs, lows have been pretty strong, India has outperformed emerging market (EM) as well since the beginning of the year. Is that a sense that you get from your clients as well because I believe this year even the FII participation has gone up as far as your conference is concerned. So, generally what has been the mood within the FIIs and how much they are looking to put more money into India at work?
A: People would love to put more money into India, it is just that we don’t supply of paper. India is in this unique situation and we have spoken about it a few times in the last two years that the amount of paper or rather the amount of money we can absorb in the country depends upon our ability to increase the market cap and the float in the market and that requires more paper to be put into the market, more IPOs to come, more sponsored selling to happen.
So, I think we are in a very unique situation. Also, the boardroom discussions on India, amongst the FIIs, have moved away from country fund or just country dedicated money to larger emerging market and global fund exposure. So it is in some ways in the big boys club say to speak and if you are able to get the paper into the market and increase the float, I think you can keep on getting more and more money.
Q: That has been a bit of a trend, right? You have seen since the beginning of the year, large blocks, large QIPs happening, even as we speak, today we are going to hear a big block in Petronet of 10 percent getting sold. I am told even there, there is a lot of FII appetite to buy into that block. So, in that sense, some bit of paper is coming for sure. Do you think that paper supply is only going to increase from here?
A: In terms of more sponsor selling, it is happening, in terms of follow on, it is happening, in terms of consolidation in the market through M&A, that is all happening. I think what we need to see is a lot of this unlisted companies in the private sector, small, big, mid-sized and we are seeing some trend of that more and more of that to come to the market get listed because equity market can offer enormous opportunity and currency, an instrument for these companies to grow. It is happening at a slow pace and hopefully that will pick up.
Q: Since you talk to a lot of your FII clients as well as domestic clients, what are the key risks that they have in mind at this point in time? I know valuations are rich, I know people are talking about geopolitical risk as well, to your mind, in your interactions what are the few things that they have discussed with you seems to be the key risk for India?
A: A large part of the risk comes from the global developments to be honest. As you said, geopolitics and the fact that per se geopolitics would not have been such big risk, had it not been for the fact that the volatility all around the world is so low. So, it seems that it is not being priced in, and that can cause some upheaval in the market, not just in India, but everywhere else at some point in time. So I think that is one challenge, if not a risk.The other near term challenge is the execution of goods and services tax (GST) and that can cause some short term disruption in the inventory cycle and the management, but I think almost everyone in the conference seems to be aware of it and if everyone is aware of it especially after the demonetisation period, this might prove to be a lesser risk than what we think of at this point in time. Lastly, a little bit on the valuations, they are not cheap, but against the background of broader market revenue growth starting to accelerate, I think people are willing to take that in the stride.