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Last Updated : Jan 07, 2015 02:37 PM IST | Source: CNBC-TV18

Macros improving; global deflation scare could hurt: Ridham

Desai expects corporate earnings growth to pick up after the next couple of quarters. He is bullish on capital goods, banks and consumer discretionary stocks like autos


India's macro economic environment is improving, but it is still not past the point where it can ignore the developments in global markets, feels Ridham Desai of Morgan Stanley.


In an interview to CNBC-TV18, he says there is a deflation scare globally and that could hurt India in the short term. But the medium term outlook on India remains solid, and that investors should look at corrections as a buying opportunity.


Overall, the mood about India is positive and foreign investors are looking to add to their India portfolio, says Desai.

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He expects corporate earnings growth to pick up after the next couple of quarters. He is bullish on capital goods, banks and consumer discretionary stocks like autos. He says the positives from an imporving economy has still not been priced in capital goods and bank stocks.


Desai is not too worried about the decline in crude prices and its implications for global growth. He says data over the last couple of months shows that global growth is fine and that lower crude prices did not necessarily mean slowing global growth.


He says the fall in crude price is because of excess supply and not necssarily due to weakening demand as is being made out to be.


Desai says the market could run up in the countdown to the Union Budget, even though the government is doing a lot of work outside of it.


He feels the Budget will be more about dfiscal consolidation, steps towards GST, and infrastructure allocation, while the major reforms like land, coal will be done outside it.


Below is the transcript of Ridham Desai's interview with Reema Tendulkar & Sonia Shenoy on CNBC-TV18.

Sonia: Are you spooked by this global sell-off that we have seen or do you think this is the best opportunity that bulls were looking for?

A: There is no reason to be spooked. I think it is not out of the ordinary that we get corrections along the way. We had a pretty much straight-line market for 2014 so I think 2015 is unlikely to be straight-line. There will be more volatility and what we are seeing right now is just one of those bouts of volatility.

Reema: How do you expect the first half of 2015 to be for the Indian markets keeping in mind the volatility in the global markets as well as India ahead of the Budget?

A: Most of this volatility is sourced outside India. My view is that the India story is shaping up pretty well. We are getting good dose of reforms, in my view the growth cycle is turning, the earnings picture will look a lot better in the next couple of quarters and inflation should be a lot lower therefore interest rates will also fall.

Essentially the domestic situation looks quite happy for equities. Globally there will be these concerns that will emerge from time to time and whenever the global trade moves from disinflation to deflation it will hurt India. I don’t think India’s macro has past that point where the global picture will not matter. In a couple of years maybe when our macro is much more robust it will not concern us. However, right now this I would call it as a deflation scare, is going to hurt in the short run.

So, these short-term corrections provide opportunities for investors with a longer duration, longer investment horizon to buy stocks and that is our view and that is pretty much what could happen in the first half. Indeed as we go later into the month of January the markets focus will shift to the Budget. As usual February is a good month for the market because the market builds up in anticipation of the Budget so it is unlikely to be different this time. So, this correction will be forgotten by then and will be anticipating a strong Budget and the market will respond accordingly.


Sonia: There is one more view in the market that the returns on equities globally will be much lower in 2014 compared to what we saw last year purely because of the lower growth projections that are underway?

A: I would want to differ with this lower growth story that is floating around as a consequence of lower oil prices. A lot of media commentary is centered around if oil prices are down that means global growth is back but if you look at global macro data recently, it has not been that bad. It is actually improving. So, I think global growth will be okay. It is not about to register a new fresh down leg.

Oil prices are going down as a consequence of excess supply more than slowing demand. So, I don’t think it automatically translates into lower growth or does not imply that growth is lower. If that is the case then it is a pretty benign situation for India which is kind of range bound global growth, soft oil prices and therefore kind of flattish interest rates globally; that would be the best scenario for India in 2015.

So, I don’t know about global equity returns, we think that there are likely positive, that is our global view in 2015 but a little lower than 2014.


Reema: Would you still recommend buying cyclicals, financials or given that 2015 might be more of a volatile year defensives might look a little more attractive if someone has to make use of this opportunity?

A: I think people should continue to invest in banks, industrials, consumer discretionary so we are certainly bullish on cyclicals and these corrections do provide opportunities to buy them cheaper.

Sonia: Coming back to the point that you made about lower oil prices, I take your point completely that lower oil prices in the longer run will be a huge benefit for markets like our own so how do you play this theme in our own markets? Do you continue to buy some of these sectors like oil marketing companies, paints, tyres, etc that benefit from lower oil prices or do you think that that story is done?

A: There are two ways of analysing this. One is the macro benefit that oil brings to India. It reduces our current account deficit, it reduces inflation and it boosts growth; that creates a better macro environment and the biggest beneficiary of that better macro environment are banks and industrials.  The second is the micro benefit which is in all the sectors that you mentioned; companies that will experience lower cost.

In my view a lot of that trade is already in play whereas the former trade is not necessarily in play. So, for example industrials could be a big beneficiary out of better macro and that is not fully priced in. So, my bias would be to buy the banks and industrials rather than buy the direct beneficiaries at this point in time.

Reema: Since global is the only risk for the Indian markets how worried should we be about what is happening in the globe? Is the environment such that it could result in about a 5-10 percent correction from hereon, just purely the global developments?

A: It is hard for me to tell the next 5 percent move and it could hold over, it could stop here. That is very hard to tell. However, the world is a bit unsure right now, that may change in a month from now so those short-term calls are very difficult for me to make and I am really not an expert in making those short-term calls.

I think the medium-term outlook for Indian equities looks very solid. When investors get opportunities, when stock prices are lower they want to buy that opportunity rather than sell it. You always keep some powder dry because you will get volatility along the way which will create opportunities.


Sonia: We heard from the Coal Secretary a couple of days ago and he mentioned that Coal India’s production will go up quite a bit. A lot of the rail linkages issues are being sorted out and the power infrastructure sector will be a direct beneficiary of that. Would you take a look at any of these sectors now to buy?

A: You are making a very good point. This is precisely the issue which is that India’s macro is improving despite the lack of any headline news. There is a huge amount of work that is happening underneath and the point that you made on coal production is a very valid one. The turnaround that has happened in the last six months is remarkable and Coal India is now producing at a faster clip than it has done in recent years. That goes a long way in improving India’s macro.

So, investors can look at these idiosyncratic developments and make stock picks but ultimately the net impact of this is that the macro gets better. When the macro gets better banks, industrials and discretionary consumption do well. So, I prefer to do that rather than dwell into the minute details of each idiosyncratic improvement and try and buy stocks on the back of that.


Sonia: How would you approach the IT space now because there has been a clear underperformance over there? I don’t know whether it is to do with the expectations from earnings or in general because people are more bullish on the domestic economic recovery but how would you approach this space?

A: I would continue to be very constructive on that. We are overweight the technology sector. The demand conditions from the US are likely to stay strong. We are also bullish on the US dollar which means that there will be currency tailwinds for the tech companies. So, beyond this quarter things will look a lot better for tech companies and therefore if these stocks have gotten cheaper they are better buys now. So, we continue to stay constructive on technology.

Reema: Yesterday we got a very large sell figure by the foreign institutional investors (FII) in the cash market. In your conversation with investors can this selling pressure in the cash markets continue, are ETFs looking to reduce their positions in India or this was a one day fall in aberration?

A: As I said earlier I cannot be really precise about the short-term forecast and flows on a daily basis are very hard to foretell. So, I would hesitate to do that but the general mood on India is quite positive. Investors globally are looking to add to India, not take away money. What they do on a daily basis is very difficult to tell but overtime you will see that foreign investors will buy more of India.

If anything I think there is a free float issue with India which is that a lot of stocks they want to buy are capped out on FII limits and that could become a bigger problem as time passes which needs to be readdressed both by policy as well as by companies. Generally speaking the sense I get is foreign investors are looking to buy India. 

Sonia: With the previous government we were so used to having high expectations from the Budget so the market generally ran up in anticipation of the Budget but this time around a lot of work is being done outside the Budget as well, as the Finance Minister pointed out with the land, coal ordinances, etc. In that sense do you think that the Budget itself may not be such a big event to watch for?

A: That is a very good point. I think there is a lot of work that will happen before the Budget. So, that will continue which in itself will probably help share prices. So, therefore share prices could actually rally in the next seven or eight weeks in front of the Budget.

The Budget itself in my view will be more about fiscal consolidation, about going towards goods and services tax (GST) and I hope to see some infrastructure allocations. However, before that I guess a lot of work would have already happened outside, so, that will help share prices in my view.

Reema: You recommended that you like the banking space, would your preference still be for private sector banks or given the work that the government is doing, the Gyan Sangam, PSU banks, the risk reward is now tilting in favour of PSU banks versus private?

A: It is a function of timeframe so if you take a medium-term view we still like the retail private sector banks. If you are taking a six months view then wholesale banks make a lot of sense because interest rates have peaked and they will start or they have actually already started declining but they will decline a bit more and that usually helps the wholesale banks. So, on a medium-term basis the private sector banks and on a shorter term view the wholesale banks is what we prefer.



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First Published on Jan 7, 2015 10:04 am
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