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Last Updated : Jun 03, 2016 10:59 AM IST | Source: CNBC-TV18

Market in a bull run; equity not for faint-hearted: Ridham Desai

From a six months view, investors should only buy equity if they can deal with global risks, says Ridham Desai, Managing Director of Morgan Stanley India.

In February this year, there were very few who were positive about the Indian equity market but now it is the beginning of a mega bull run in a 3-5 year horizon, said Ridham Desai, Managing Director of Morgan Stanley India.

Talk of the bull and Nifty touched its highest at 8224 in 2016.

In an exclusive interview to CNBC-TV18, Desai said from a six months view, investors should only buy equity if they can deal with global risks. Though he himself denies trading in stocks, Desai indicates risks will be lowered if investors follow a systematic investment strategy.

While it is very difficult to overcome market fears, people today have started to pile stocks, he said. Supporting the stance, Desai said with a good monsoon, bottomed-out earnings, markets may touch new highs, barring a few global macro issues. He is of the view that the Sensex in the last 10 years has given the same returns as 10-year bond yields.

Meanwhile, he is bullish on consumer discretionary and believes the sector can give superb returns due to the rise in consumption demand and valuations are not fully priced in. He further believes retail banks are cheaper than corporate banks.

Below is the verbatim transcript of Ridham Desai’s interview with CNBC-TV18\\'s Sonia Shenoy and Anuj Singhal.

Sonia: What is your best and your worst stock investment?

A: No, I don\\'t go down to stock.

Sonia: We know your best investment is Page Industries.

A: I don\\'t put all my money into equities. I am too scared to do that. So, I always have cash on the side.

Sonia: You recommend investors to put all their money into equities but you don\\'t do the same?

A: No, I don\\'t say that ever. In fact I tell investors don\\'t try to call the market. Just put on a monthly basis. Don\\'t deal with your own psychology, it is very risky. I was telling Anuj in February I got very lucky, I made a call, buy the market it worked. You don\\'t get the luck all the time. Sometimes it comes in your favour, sometimes it goes against you. The problem was not that the call have been right, you only know that later. In that moment at the end of February nobody wanted to buy equities. Everybody is predicting 6500, some people came and turned around and said 5500, here we come. So, psychology is a very difficult thing to overcome.

So, the best thing to do is to not look at the markets and just invest every month a fixed amount of money and then the results will be good. There is a lot of research on this everywhere in the world where if you invest on a systematic basis which actually beats point to point returns over 5-15 years. So, that is the best strategy. You have to consider my age before you ask me that oh, why you don\\'t have 100 percent of your money in equities. I have to have cash on the side.

Anuj: Do you use the 100 minus age formula or what?

A: No, the 100 minus age formula is complete bollocks.

Anuj: You are bullish on the broader market for sure. What are the key areas that you are bullish on right now?

A: It is a personal timeframe. If you take a 3-5 year view we are in the beginning of a mega bull market. If you take a 3-6 months view you could really hurt badly if things go wrong because markets around the world seem to be priced for perfection and are not bothered about anything going wrong. So, that is the risk. If you can deal with that risk then you buy equities. If you can\\'t deal with that risk then stay on the sidelines and wait for that moment to come but as I said earlier when that moment comes you don\\'t feel like buying stocks because when stock prices are attractive you don\\'t feel like buying them.

Anuj: Of course we are not discussing stocks here. But you got some really good stocks in February and some of these stocks have rallied 50-60 percent. In the month of February when you made that call, when you bought the market you almost got the low in so many stocks. You said you got lucky but what do you do at a time like February when everything is falling like nine pins?

A: Over the years I have kind of tried to learn to deal with my own fears and I am achieving some degree of success. Not a lot, but some degree of success. I still get scared a lot of time but yes, maybe that was one of those moments when I got a little bit of success in dealing with fear.

Sanjay deals with fear a lot better than I do. I know it, I have worked with him for 20 years. He is very good with at dealing with fear, he is also very good at dealing with euphoria. I am a little less good at dealing with euphoria, but I am trying. He is very good at selling stocks.

Sonia: You mentioned risk a couple of times and asked Sanjay this question as well. Everyone and his uncle is bullish on the market right now. It tends to get a bit crowded this bullishness. What is the risk now to this market. Is it if Governor Rajan doesn\\'t get an extension, is it Brexit?

A: We will only know after market corrects what causes it to correct. In fact we will only know after that by the way. Markets correct for their own reasons which are almost to mankind. They go off for their own reasons which are almost unknown. Can you figure out why the markets went up?

Anuj: Today?

A: No, after February.

Anuj: No, maybe it became too overcrowded on the short side. That explained the first part of the rally. I have not been able to understand the second part of the rally.

A: Yes, but you were not in a position to say this on March 1, when the market was turning. So, it is so hard to tell why the market will fall. I agree with you that there is a lot of bullishness out there. It feels that way. It feels like people are now piling in after a 1300-1400 point rally on the Nifty and therefore it is not a bad idea to put some cash on the side and wait for correction. A good monsoon is in the price, Brexit is not in the price. People are complacent about Fed. People have gotten enthused about earnings which is okay but it is still spotty. Earnings in my view have bottomed, but I said that a year ago and then we went down again. So, you can trust me only for that much, but earnings have bottomed and the season was good. But there are a few macro issues. Our global view is not sanguine and for Morgan Stanley\\'s equity strategy team Japan, Europe, US, emerging markets (EM) to be bearish synchronously is a warning signal for me.

Anuj: Nifty has made a new 2016 high, not a lifetime high, but a new 2016 high.

A: Do you remember last year when you were here. We had hit a new 2015 low. The market was sinking and you didn\\'t want to look at the screen.

Anuj: Last year the market made a new high on the day we had the RBI rate cut and there was euphoria and after that the market kept going down and through December it kept making lower lows. This year the market made bottom on the Budget day. Do you get a sense that this is exact reverse of last year and the market will now keep making new highs and while there will be disbelief but you never know by the end of the year.

A: One disadvantage you have, you are a very smart guy, but you have one big disadvantage which is that you have to look at the screen on a daily basis. In fact on a minute by minute basis. It is a huge disadvantage that you suffer. The market has done nothing in the last 12 months.

Anuj: So, over the one year it has not gone anywhere but it has given great opportunities to build portfolio.

A: If somebody bought the market a year ago he has not made any money.

Anuj: On the Nifty, but individual stocks a lot of money has been made.

A: Your point on a few stocks did well and you could have made money is an exposed comment. Let us try and see what will happen in the next 12 months. Keep it on record, we will come back next June to test whether that has worked or not and it is not so straightforward. It can be said in hindsight.

The fact is equities have struggled which therefore makes me more bullish on the long term. Markets have not delivered - in fact I just did this exercise. 10 years trailing returns on the Sensex are eight percent. That is equal to 10 year bond yield. So, if you had bought the 10 year bond yield ten years ago without risk, volatility you would have made the same money as Sensex. When I look at that data point very bullish on the market. The last time such a thing happened it was in 2001-2002. If you had bought the Sensex then you got a ten bagger on the Sensex in the next five years. I am not saying you are getting a ten bagger again but it just puts into context how trailing returns are. But if you look at the last three months then you use the three month trailing return to make a three month forecast, you use the 10 year trailing return to make a 10 year forecast. You use the last one year return which is nothing to make a one year forecast, it looks okay. You are using trailing returns to forecast is fraught with risk but the markets look fine.

Sonia: I read a couple of your recent interviews and you have indicated that you have a bull case of 30000 on the Sensex. That is something you mentioned to us as well. That is about a 12 percent upside from here. What do you think the leaders of this rally could be? I don\\'t want stocks, I want sectors or themes.

A: You have decided that the market is going to my bull case. My base case is 26000, the market is already past that level.

Sonia: If it goes to your bull case where do you think the leaders will come from?

A: Consumer discretionary, we are very bullish. We are making three big calls. We are saying the Goods and Services Tax (GST) is getting passed. I don\\'t think it has major market implication but it will boost sentiment to some extent. The corporate debt cycle has peaked, that doesn\\'t mean you go and hunt the public sector undertaking (PSU) stocks because they may not have completely reported all the pain. But it is incrementally good macro news and consumer discretionary is going to give you super returns over the next 12-18 months because consumption demand has also turned and I don\\'t think it is fully priced in. The valuations are okay. So, maybe consumer discretionary leads it followed by banks. Banks always will be in play because it is such a big sector. Markets can\\'t make new highs without banks actually rallying. And in the banks you want to buy private sector over public sector.

We are actually saying that retail loans in India which are currently about 13 percent of gross domestic product (GDP), that number may double in the next 7-8 years. Corporate loans used to be 25 percent of GDP at the start of the previous decade. In the subsequent 10 years it doubled to fifty. That led to topline growth of 25-30 percent of the corporate banks and corporate banks outperformed retail banks in the previous cycle. People have forgotten that because in this cycle it is opposite. But now retail loans will do what corporate loans did in the previous decade and that will be great news for retail banks. So, we just started this. People think retail banks are expensive, they are not. They are cheap, they are cheaper than corporate banks. Don\\'t go by headline price to book multiples because they will report growth and they will have cash flows that will essentially make the stocks attractive.

Sonia: You still haven\\'t told us your best and your worst investments. You still have about a couple of minutes to do that, your best and your worst stock investments?

A: I don\\'t keep memories of my best and worst. They are very dangerous memories to have because they actually tend to fool you. The easiest person to fool in the world is yourself. But there is a quote from Warren Buffett which will be a useful utility to all of us and your viewers. Warren Buffett said rich people invest in time and poor people invest in money. And he said it in some context. But the context for me is that if are still investing in money then you are poor.

Ridham Desai: You are bullish, but what will happen in the next three months?

A: Tough one, I think the markets are going to be volatile. It’s not going to be easy over the next three months. We have seen a run up and it will all depends upon how the global factors play out, but safe to say that it will be more volatile and not necessarily higher up, but if you take a little bit more than three months its look really good.

Anuj: How do you deal with both greed and fear?

A: The last one is difficult. Fear, I’ve been married for 23 years, you learn to deal with fear when you have been married for 23 years. Greed, whenever I feel extremely passionate and this is the really time to buy stocks, that’s the time to go on a holiday and not do anything.

Anuj: But individual stock a lot of money has been made?

A: The story of India has always been there. We can keep on looking at the market, the reference point to decide whether things are good or bad, but in reality at every level in the market it’s always been about a set of stocks which do well and a set of stock which don’t do well, that’s really the way you will have to look at it.

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First Published on Jun 2, 2016 03:45 pm
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