Mar 01, 2013, 07.44 PM | Source: CNBC-TV18

Macros good; use current dip to buy stocks: Morgan Stanley

Ridham Desai, managing director of Morgan Stanley, advises investors to look at this current dip in prices as an opportunity to buy stock.

Ridham Desai

MD & Head of India Research, Morgan Stanley

Expertise : Equity - Fundamental

More about the Expert...

Indian equities came crashing down yesterday after Finance Minister P Chidambaram proposed changes to the norms governing the tax residency certificate (TRC) required by foreign institutional investors. Confusion regarding this tax issue spooked FIIs, who withdrew over Rs 1,000 crore from the market yesterday, pushing the market to a three-month low.

While the outlook for the market remains uncertain, Ridham Desai, managing director of Morgan Stanley, advises investors to look at this current dip in prices as an opportunity to buy stocks.  "Six months back, prices were very attractively placed, valuations were low, but the macro seemed very uncertain. The macro is certainly better than what it was and now stock prices have come down all over again. So I think this is an opportunity to buy stocks," he said in an interview to CNBC-TV18.

Macro-economic indicators improved ever since Chidambaram cane to be the head of the Finance Ministry and implemented a slew of economic reforms. Desai believes that the most worrying factors right now, the current account deficit and inflation, are expected to improve but will reflect only with a lag. He also expects to see the Reserve Bank of India to start its monetary easing cycle.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What are your thoughts on that googly on the Mauritian Foreign Institutional Investors (FII)? Do you think it is such a big deal or is it something which is roiling your clients this morning?

A: It certainly was yesterday. If you look at the market post-Budget there was hardly any reaction. Then suddenly this fine print came to the market's attention and caused the market to selloff. There was some lingering uncertainty overnight.

So, I do not think that it has been settled despite some reassurances from the Finance Minister and the Finance Ministry. The market is awaiting greater clarification on this matter. It does not seem to have been settled. I came away thinking that it is not likely to be a big thing, but the market is still a bit edgy about it.

Q: In your conversation with clients and colleagues what is the sense you got? Is it going to lead to some near-term selling pressure or are people just sitting on their hands for the next 24-48 hours? They do not want to put in any money till they know where things stand clearly with that tax issue?

A: Investors are assessing the situation. They are trying to understand the fundamental impact of the Budget. I do not think investors look at it from a one to two day perspective. There might be an opportunity in the pipeline. Let us evaluate this and step back for a moment.

Six months back prices were very attractively placed. Valuations were low, but the macro seemed very uncertain. The macro is certainly better than what it was and now stock prices have come down all over again.

So, investors are likely to step back and evaluate the fundamentals and come away thinking that okay, maybe this is an opportunity to buy stocks. So, I do not see any immediate reaction, except for some short-term traders or short-term investors who may have taken money out yesterday in response to the kind of panic that has spread in the market. However, from hereon, I think there will be a little bit more considerate evaluation.

Also read: Budget 2013: Is Chidambaram's tax googly beneficial to foreign investors

Q: Is the macro really better? We have got a 4.5 percent print and nothing to suggest that it will be much better in the current quarter. Current Account Deficit (CAD) is worse than what it was six months back. Aside of inflation what is there to cheer about on the macro front?

A: There were three things. First is the macro stability indicator, which is your fiscal deficit and CAD. Second is the growth indicator and third is inflation. I would say that all of these are actually better than they were or at least looking like they will get better. The fiscal deficit was annualising 6 percent in September. It is now likely to be 5 percent, maybe not 4.8 percent. However, it is unlikely to be much higher than that.

So, we have certainly achieved a 1 percentage point fiscal consolidation largely through expenditure cuts, though it has not reflected it for next year. The second is of course the CAD, which was worst in the December quarter, will start improving. The CAD will respond with a bit of lag. However, the 1 percent curtailment of spending by the government will result in lower CAD numbers.

Inflation seems to have peaked and the Wholesale Price Index (WPI) is already suggesting that. The seasonally adjusted rate of inflation, the three month moving average is already at 2.9 percent and that leads the headline number by three months. So, the headline number is heading a lot lower in the next three months. I think consumer inflation should follow suit.

Finally on growth, the third quarter GDP print was a bit lower than what people expected. However, there were a few nuances there and our expectation is that actually growth will improve from hereon. We think the fourth quarter number will be in excess of 5 percent.

As one goes into FY14, at least the GDP growth number looks like it is going to 6 percent, so that is also improving. On all counts the delta is positive and the markets care for the delta. So, I think that is something that we can say that the macro is looking better than what it was six months ago.

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