India's long-term equity story remains strong, says Morgan Stanley MD

At the Business Standard BFSI Summit, Morgan Stanley's Ridham Desai said India's weak market performance this year mirrors global trends, and the country is expected to outperform in the next downturn

Morgan Stanley’s managing director and chief India equity strategist, Ridham Desai, on Friday said that India’s long-term equity story remains strong even as the Indian market has underperformed global peers this year, citing deep structural improvements that have made the economy more resilient.

 

Speaking at a fireside chat titled ‘Why am I bullish on India?’ at the Business Standard BFSI Insight Summit in Mumbai, Desai said while he has been bullish on India since 2014, it doesn’t mean that its equity performance will provide returns every year.

 

“It doesn’t mean the market will deliver absolute returns every year. Equities is the longest-duration asset class. You have to have a long-term view,” he said.

 

 

He pointed out that India’s transformation over the past decade has been fundamental, particularly in reducing its external vulnerabilities. At the centre of which lies its saving deficit or current account deficit, he said.

 

“Our oil dependency has gone down 60 per cent. Our economy has quadrupled since 2008, and our oil import bill has gone up 80 per cent during the period. It is no longer consequential to our fundamental account, which means we are not running such a large savings deficit,” Desai said, explaining how India’s rapid economic growth and reduced reliance on imported energy have lowered the impact of oil on the current account. 

 

Another reason for his optimism is the rise of the global capability centres (GCCs). “One of the silver linings of Covid-19 is that multinational corporations (MNCs) realised it is okay to work from home. It is okay to work from Mumbai, which is cheaper than Florida. It has triggered a big boom of GCCs. They exported $70 billion of services in the past 12 months and it is going to double in the next four to five years,” he said.

 

As a result, Desai said India’s current account deficit has fallen below 1 per cent, making the economy less dependent on foreign portfolio inflows.

 

“We are not so dependent on global capital market flows like we used to be. When you are not dependent on capital market flows, the beta of the market goes down. It was 1.3 in 2013. Today, India’s beta is 0.4. It’s a quintessential defensive market,” he said.

 

Beta is a measure of a market’s volatility or sensitivity relative to the global equity market. A beta above 1 indicates that a market is more volatile, while a beta below 1 suggests lower volatility and greater stability.

 

Desai further explained that India’s relative underperformance this year is a function of global trends, and it will perform better during the global downcycle.

 

“The most proximate reason why India has not done well this year is that we’ve been in a raging global equity bull market, and India is not going to do well. It’s a consumer staple stock. Consumer staple stocks don’t do well. When the next bear market arrives, India will flourish,” he said. 

 

Speaking about threats to market growth, he said the risks largely lie outside its borders.

 

“The world is looking very messy. It is sitting on record debt and is ageing. We as a race have not figured out how to reverse the declining population,” he said, adding that while India appears to be stable, this could be a potential threat.

Domestically, Desai identified agriculture as a key sector requiring reform. We have approximately 200 million farmers, and the farm reforms that were proposed a few years ago were extremely bright and necessary, he opined. “We need to lift our farmers out of poverty. Otherwise, the remaining 1.1 billion people who don’t depend on farming will race ahead,” he said.

 

He said India’s low farm productivity limits its potential, adding that matching China’s efficiency could make the country’s farm economy worth $2 trillion and enable it to feed half the world.