Dip seen but India will fall less: Ridham Desai

“Our target on the Sensex 12 months down is 27,500, while our bull case is 30,000,” says Ridham Desai, head of India equity research and India equity strategist, Morgan Stanley. He was speaking at the multinational financial services' entity's 18th Annual India Summit here.

Morgan Stanley thinks every equity market in the world could fall in the coming months, reason for the relatively limited upside on the Sensex. "If there is a correction in global equities, as we saw in January-February, India will not be spared.  The fall might be less than the other markets but it will fall on an absolute basis,” says Desai.

Underlining the outlook on equity markets, Desai explained key calls that would define outlook on equity markets.

 

“From the stock market perspective, the corporate debt cycle has peaked,” he says. One of the reasons for the peak in the corporate debt cycle is nominal debt accretion has collapsed, which is the precursor in reduction to debt-GDP. "But corporate debt cycle, which was pretty bad, as bad as in the late 90s has now peaked."

The second call, according to Morgan Stanley, is the consumer discretionary stocks. Analysts at Morgan Stanley think discretionary consumer spending is likely to rise in the next 12-18 months' time. "Valuations for these stocks are pretty reasonable. This is a good combination — reasonable valuations and upgrade in cycle because of a turnaround in macros for discretionary consumption," says Desai.

Going forward, his third trigger is the earnings cycle. "Overall, the earning cycle has struck. If we cross out corporate banks, this is the best earnings that we have seen since the Modi government took over." He believes this is the beginning of a new earnings' cycle. "We think earnings growth will be in double digits over the next 12 months."

Speaking about his narrative on the government and its policies, he said inflation and lack of earnings in the past gave the impression that the government has not done a decent job. But going forward, he thinks the narrative on the government is likely to change. He is positive that the crucial bill of Goods and Services Tax will be passed by the Upper House of the Parliament. "We think the GST will be passed later this year, not because the BJP has won seats but because Congress has lost seats."

On the global front, Desai believes India is relatively good in an otherwise broken emerging market world. "India will outperform the emerging markets in the next 12-18 months."

Lastly, on valuations, he agreed that India's relative valuations are not cheap. But considering India's superior growth prospects, it will help India do well. "We are not bullish on equities, so nominal returns will not be that attractive, but on a relative basis, India should do well," says Desai.