MC: Global investors are underweight India, says Ridham Desai
The Central Statistical Organisation (CSO) is set to post its report card on India’s fiscal fourth quarter GDP numbers today. Despite periodical rate hikes by the Reserve Bank of India (RBI) to tame inflation, the agency is widely expected to report 8% plus economic growth. The central bank has increased interest rates nine times in 15 months.
Even though India’s growth story continues to show strong recovery, many investors and analysts are worried about rising commodity and crude oil prices which are casting doubts on the country’s economic recovery. The Indian government had set an economic growth target of 9% for this fiscal year.
Ridham Desai, the managing director of Morgan Stanley, on the sidelines of the Morgan Stanley India Conference says we have been continuously hit by a slew of negative news. “From alleged corruption scandals, to high interest rates and inflation numbers, all this newsflow has not been kind to the market,” says Desai. However, even though he finds the market trading in a range, he says the underlying growth in the economy continues to remain buoyant.
On the lack of liquidity flowing into our market, he says India has suffered relative to its peers because they have been strong in equities around the world. He cites global investors being underweight on India as the main cause. “They have taken India down primarily on the back of concerns that inflation has run away and the rate environment will remain stiff which will cause economic growth to slowdown.”
Below is a verbatim transcript. For the complete details watch the accompanying video.
Q: What is the sentiment on India and how are things positioned right now?
A: The mood looks like it is time for investors to revisit various themes. India has gone through a period of newsflow which has not exactly been kind to the market whether it’s the alleged corruption scandals, rising oil prices, rising interest rates or sudden inflation. So we have got a slew of really bad news over the past several months.
Investors are now taking a relook to see if corporate fundamentals are in shape. To me, corporate fundamentals look a lot better than the macro and compare that with where stock valuations are they certainly are a lot better than where they were at the start of the year. It’s kind of like revisiting that time. Therefore it’s very opportunistic for them to be at this summit and meet India’s top companies and CEOs and CFOs and figure out what’s happening in the corporate world.
Q: Is there some kind of disconnect between the macro and micro or do you think the micro will eventually come around reflecting these macro concerns which have kept investors there because all this talk of inflation, interest rates, growth slowing down eventually has trickled down to earnings. If not it’s a great time to pick stock as you are saying but which side are people learning towards in that debate?
A: It will indeed trickle down at the macro level and in fact it is trickling down at various levels of corporate earnings. If you look at EBITDA margins for example they are not exactly in good shape. You have seen EBITDA margins come off, revenue growth has been strong but profit growth has trailed revenue growth.
So in some ways, the tricky macro is reflecting in corporate earnings that is there are cost factors and companies are not able to pass on some of their cost pressures to their customers so they are facing margin pressures for it. The underlying growth in economy remains quite resilient and strong which is reflected in revenue growth and the sum total of that is that profit growth has slowed.
To an extent it has come to fundamentals but what I do see is some digression in terms of earnings performance going forward. Not all sectors will do well. Some sectors will reflect the macro more aggressively than others. That is really the opportunity for investors to pick stocks through this macro environment and make money.
Our view is that it is a very good time for stock pickers; they can easily distinguish between the earnings of various companies and their valuations and probably end up still making money even though market in the near-term appears to be rangebound.
Q: We have not seen too much by way of flows supporting India. We have seen net outflows not very large this year and we are already through with the first half of the year. Do you see a lot of long only funds taking these calls of picking up stocks getting interested or are they still waiting for lower levels to get in?
A: Flows have to be seen in a relative context. India has suffered relative to its peer groups. So flows have been strong in equities around the world and India has suffered by not receiving those flows or seeing some outflows. There have been some relative positions.
My conversations with investors at the summit and otherwise reveal investors are actually underweight India. So a lot of people have marked that action on their portfolio. They have taken India down primarily on the back of concerns that inflation has run away and the rate environment will remain stiff which will cause economic growth to slowdown.
That is the base case picture for investors. The surprise will be if something happens which is different from this either on the downside or the upside, which will then automatically trigger a move on the markets. So that’s where investors are currently positioned.
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