Worst seems to be over, mkt may hit new highs: Ridham Desai

Analysts are approaching Samavat 2069 with lots of optimism. Ridham Desai, Managing Director of Morgan Stanley feels that the worst is over for the market now. He is positive that the market is likely to hit new highs by next Diwali.

In an interview to CNBC-TV18, he said, "Certainly as we approach next Diwali we will have a bit more political uncertainty because there may be elections that may be drawing closer. Overall we should be looking at market that should rise to higher levels over the course of the next 12 months."
Desai also adds that corporate earnings is also gradually improving. Also read: Damani, Kela, Chokhani puts bull mkt stamp, say buy on dips Here is an edited transcript of his comments. Q: What is your call for next year? Are we on to a good thing here?
A: We are looking for a prosperous new year. Indeed if you wind back to last Diwali, it looked all very depressing, but it didn’t turn out to be such a bad year. I think the next year is going to be probably as good if not better. Valuations for the market are in lower than fair territory. More importantly the earnings picture is turning. Corporate fundamentals have put in a bottom.
We are seeing a lot of indicators that lead corporate earnings actually look up, many aggregates are looking up, terms of trade have improved, the rupee is no longer over valued, the investment rate seems to be stabilizing. So, corporate margins is likely to improve. We have already seen that in this earnings season. Earnings have been quite good on the whole and I think it will keep improving as we go forward.
India’s tail risk also is considerably lower than last year. Last year we had a terrible December, all evidence of the tail risk that India faced. Then we have got a little bit of policy tailwind as well. Certainly as we approach next Diwali we will have a bit more political uncertainty because there may be elections that may be drawing closer. Who knows, we may get general elections by then. So, there may be a bit of uncertainty, but overall we should be looking at market that should rise to higher levels over the course of the next 12 months. Q: Just on that point you raised about the elections because the market's relationship with politics is quite nervous. How important do you think it will be and what kind of outcome do you think that the market is looking for?
A: There will be a bit of debate around that. But market historically does not presume a bad outcome of general elections. If you look back in the last 5 or 6 general elections, the market tends to anticipate good results. If the results are bad then they sell off after the results. So, I think investors may not worry about the prospects of a hung parliament, but if the parliament does turn out to be a hung one, then ofcourse the market will face a period of correction or consolidation or whatever the case may be depending on the election results.
I wouldn't really worry about the market going into the elections. As you draw closer and depending on where the valuations are, and mind you all this conversation is contingent on how much the market goes up and where the valuations end up being. If the market rise inline with earnings or forecasted earnings growth, then you may not really be so worried about the election results.
Instead if you get very concrete multiple expansion, which means that market rise a lot more than what I envisage in a base case scenario, then I think there will be greater worry. So, the starting point of valuations will be crucial to how the market behaves going into election uncertainty.
_PAGEBREAK_ Q: The market has done too badly over the last one year. Are you bit perplexed that people have still not taken the bet and are still sitting it out? All you hear is all-round skepticism about stocks?
A: I am not at all surprised because if you look at household portfolios, they have made a very strong choice in favour of real assets. Inflation has been high and normally in a high inflation environment, retail investors prefer real assets.
So, property and gold has been at the top of their buy list. Offlate gold has lost some lustre and property has taken its position. When we look at data for household savings, you see the share of physical savings going up and share of financial savings going down. This is a typical response in a slightly higher inflation environment. Then again from a psychology perspective, retail investors respond to trailing returns.
Their incremental flow is based on what they have earned in last three or four years. In the last three or four years, equities have certainly not been at the top, indeed it has been at the bottom. Fixed income yield has been better than equities. The order of preference here is property, gold, fixed income and then equities.
I am not at all surprised at this reticence shown by retail investors towards equities. It will change. It will change when the trailing returns for equities get stronger and then you will see the flows turning. That I think, is a situation, which we may see in the next six to eight months. But investors in the retail space do react to trailing returns and therefore their response comes with a bit of lag. Q: Would you say that there is a definite chance that fixed deposits become less attractive over the next one year, something which a lot of the retail and HNI people have been hiding in for the last 12-24 months?
A: Absolutely, I think the peak for deposit rates may have already been put in place over the last 2-3 months and certain deposit rates have already come down. I don't think they are going to go back there. In all likelihood, rates will be lower in a year from now. People who are invested in one year fixed deposits thus will face a re-pricing risk and therefore may not go back into that asset class. There is a chance that deposits become less attractive.
Now where the deposit growth is? It is going to be a function of overall liquidity. Usually deposit growth rises when liquidity is strong which i turn depends on India’s balance of payment which is a function of inflows and current account deficit. I see that situation improving over the next 12 months. Deposit growth per se may not come off but deposit rates certainly may have peaked.