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Morgan Stanley sees Sensex at 33900 but conditions apply

Morgan Stanley has upgraded its June 2015 target for the Sensex to 28800 after today’s rally, says managing director, Ridham Desai.

However, that’s his conservative estimate. Desai expects the Sensex to rally as high as 33900, but with some conditions: if the government continues to work on it fiscal consolidation path and the Fed doesn’t take an disruptive policy action. If these two conditions are met, then Desai says, the Sensex has about 40 percent chance of seeing this level by June 2015.

A 360 degree turnaround in sentiment regarding India, apart from institutional flows has led to this market rally. And a lot of it has to be credited to the government, believes Desai.

“People abroad have faith in the potency and execution of the new govt. They are sending the right signals. The Goldilock-like scenario that is unfolding, both on the macros as well as the micros, will change for sure, but we are fairly comfortable for the next three years atleast,” says Desai.

On sectoral plays Desai prefers staying away from retail and industrials, but is confident on Indian IT companies and private banks. He sees demand in autos and food sector growing over time.

Below is the edited transcript of the interview to CNBC-TV18.

Menaka: 1000 points in barely 2-3 months, a 100 points in 24 hours, what do you make of the speed with which we are moving up at this point?

A: There is a global rally in equities, it is not just India. We are underestimating how much of this is global. There is a very big India story that a lot of people have a lot of faith in.

I have met a lot of investors across the world in the month of July and nobody was bearish on India. So, people have amazing faith in the potency and the execution capabilities of this new government. So far so good, it seems like they are sending the right signals out there.

Investors’ faith is rising and we have this push from the world. It seems like a Goldilocks- scenario. It will change. It is not going to go up 100 points a day forever. However, I feel fairly comfortable with a 3-4 year view. You actually want to just shut this off for the next 3 years and let your money ride this market.

Senthil: One disappointment that we hear when we speak to some investors is that this government’s failure to articulate major reforms. Is that something that worries you or do you think what they have done is part for the course?

A: This has come from a lot of people. It comes largely from journalists; not in India but outside India. So my rhetoric is- what are these reforms? I want to know the list because back home, it feels a little different. It feels like we are changing things which could not have been changed and which we do not believe could have been changed. Just easing our procedures, disintermediating the bureaucracy, disintermediating ministries and these are changes which are far-reaching. In my view they are big reforms.

Senthil: So, you are saying that state of policy reforms were already there in the books, administrative reforms oiled the systems in a nice way?

A: Yes, India has got the tailwind of demographics like no other country in the world and don’t underestimate the power of having good demographics. I can give you an example of where it doesn’t work, like the Middle East. But it can work in India because we also have democratic institution. What we need is more robust institutional framework and we need better execution.

So the work for the government over the next five years is to ensure that it leaves a trail of institutional framework which by the way is what the Prime Minister achieved as Chief Minister of Gujarat over a ten year time frame. So now Gujarat is running on its own. It doesn’t require political intervention at every step and hopefully if he can leave that behind for India we will have a very glorious two-three decades but these are hopefully not last famous words.

Menaka: When people look at the diesel under-recovery from the outside in, I am sure in July when you were meeting investors these are the things they are looking at, whether it is the UPA government and P Chidambaram who put it into play or Narendra Modi’s government who might take it forward?

A: If you see the last two months, the government has crashed expenditure. The trailing 12 month deficit in March was running at 5 percent. By the end of July it is running at 4.2 percent.

Senthil: What is the quality of that?

A: It doesn’t matter. Quality means there is no postponement of expenditure. In March expenditure rolled over into April and May. So, there was a big jump up. All that has now been absorbed and in July we are running a trailing 12-month number of 4.2 percent. The 4.1 percent target that was set in the June Budget which looked very unrealistic, which drew criticism from all quarters now looks achievable. The government has not yet divested a single crore of shares. It has not collected telecom revenues, these are without those revenues. So, they have managed expenditure extremely well.

So, when you talk about diesel subsidy, obviously it is contributing to this but this government means business.

It is not only about the government, we are also in a cyclical turn. That is also something that is playing in the markets. So, you have a structural potential via the governments mandate, you have a global rally which I don’t think we should underestimate and we have a cyclical turn, so it is Goldilocks like situation. A confluence of a lot of favourable factors, some of this will change in the next few months.

Menaka: What is more susceptible to change, let’s assume for a minute that the structural changes in the economy will progress, at varying speeds but will progress given the nature of this government and the faith in it, will the global factors remain as conducive. This is a question we put to everyone and nobody has an answer, so they sort of find a way to evade it or they say, who knows, we will see in March-April next year or June-July next year?

A: Who knows is the right answer but let me just try and speculate what can happen. It is a unique situation where we are getting into 2015. India opened its doors to foreign investors in 1993. Since 1993 to 2014 we have been in sync with US rate cycle. So when US was raising rates we were raising rates, when they were cutting rates we were cutting rates, for example 2003-2008.

For the first time in India’s history since it opened its doors to foreign investors in 22 years we may be doing the opposite, which is America may be raising rates and we will be hitting the peak of our rate cycle. This pro-cyclical tightening brings uncertainty to our doorstep and I really don’t know how this will play out in the marketplace but it is going to be an event that we have not got any experience of. So it will bring volatility to our markets.

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