Investors are showing interest in Asia in the face of the US-China trade war and the first quarter of 2020 should be “constructive” as the bulk of problems related to growth are behind us, Morgan Stanley India Managing Director Ridham Desai has told CNBC-TV18.
The Sensex hit a record high of 40,816.38 during the morning trade on November 20, while the Nifty flirted with 12,000-mark. The markets have been doing well in contrast to a slowing economy.
"The market is generally a forward-looking animal. Hence some growth going ahead is already priced in," he said after a Morgan Stanley conference in Singapore.
The market has dealt with a lot of news in the last year or so and things were looking up. Global growth, too, is getting back on track while in India, Desai believes, margins have started expanding, though revenue growth is definitely sluggish.
"Companies seemingly have pricing power which lifts gross margin. Many companies have not added capacities in the last few years and now corporate tax rate cut. Hence, we are on the way towards better profit growth. On top of that, if the top line improves, then the profit growth in India would be in 20 percent handle," he said.
Following the Essar Steel judgment, there are valuation opportunities across financial space, including non-banks and private banks, and in fact, there is a long list of stocks to be bought, Desai said.
The Supreme Court on November 15 set aside the National Company Law Appellate Tribunal’s order, saying the ultimate discretion on distribution of funds would be with the Committee of Creditors (CoC), which was favourable to lenders. The CoC typically consists of banks.
The court said it is the bank's decision to maximise the value of the corporate debtor and CoC should also balance the interests of all stakeholders. The tribunal cannot interfere with the commercial decisions taken by the CoC, it said.
Morgan Stanley prefers private banks because of adequate capital, good growth prospects, decent valuations and reasonable upside. "We prefer select NBFCs where the business is robust and balance sheets are not a problem," Desai said.
The government’s focus on the divestment process is positive and will have far-reaching implications.
"Divestment including privatisation has macro implications and is very very positive, return on capital in some public sector companies is very high. We are happy to see privatisation back on government's agenda after a long time, which is good for capital markets and economy," Desai said.
Commenting on oil marketing companies, he said a lot of them are large in size, have a strong market share and probably better return prospects. "Energy sector per se looks interesting, like select energy companies in India," he added.
Talking about the telecom companies' plan to hike charges, Desai said, "If tariff normalisation happens, then cash profits will be very large in the coming years. In fact, in India profits very depressed and declined in the last decade; hence there could be a big mean revision cycle in cyclical stocks."
Among sectors, the global brokerage likes consumer discretionary (including auto), industrials and financials.
"In the last two months, FIIs exposure to India went up slightly. We are constructive on emerging markets…as more money is coming to EMs including India," he said.
"FIIs are bullish on India, though disappointed with earnings growth last year. If growth comes back, they will (be) back pouring in more money in the next 12-24 months."
He said India has strong ingredients like growth valuation support, FII flow support, government support etc. Hence 2020 will be better for India, Desai added.
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