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Modi premium over, market focusing on quality: Ridham Desai

Indian equities are done away with the Modi premium over the past three months and are back to focusing on high quality stocks with high earnings visibility, says Ridham Desai, Managing Director, Morgan Stanley. However, this skepticism is good for the bulls, he tells CNBC-TV18 in an interview.

Second quarter earnings season, which kicks off from October 10, will be watched out and sectors like healthcare, technology and consumer staples are likely to post strong growth, he adds.

Once earnings are out of the way, the state elections will be market’s focus in the start of Q3. “The BJP is taking risks by going alone in Maharashtra state elections and the market is trying to price in this event. But any adverse election result for BJP in Maharashtra could be a negative cue for the market,” cautions Desai.

On the macro front, Inflation remains a major concern for India at this point of time, but Desai expects the inflation situation to improve in the next six-eight months.

Globally, markets are likely to remain liquid as recovery will take time and among EMs China is looking vulnerable negative for the market in the short-term, he says. “ We are seeing FII selling in anticipation of a difficult October month . Going ahead, global factors and government  action at home, will play key role in market movement.”

On sectors, Desai prefers betting on discretionary consumption stocks over industrials in the cyclicals space. From the defensive pack, he finds IT as a good bet consumer staples purely based on valuations. He also sees potential in the energy sector given the government’s focus on this space.

Below is the verbatim transcript of Ridham Desai’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Latha: After a lot of optimism from the markets and from India Inc and the lay public — after six months, people have started questioning the Modi premium, what is the near-term sense? I know you are a marathon runner as far as markets are concerned, but for just one thing like a sprinter, a thing like a 400 meter guy, tell us for the near-term do you think the market has something to worry in terms of having run too hard and because policy decisions are not quite coming fast?

A: The point you are making is a very good valid point. Market has given up on the Modi premium not today, it has been giving up for the past three months. In fact, if I am not wrong, since the election day, beta has underperformed, cyclicals have underperformed, the market is back to quality like it was before September 30 or October 30 when the market started building in favourable election result. So it is back to the anchoring that it has had for five years, go and buy technology, buy consumer staples, buy healthcare, buy whatever has visible earnings growth. Let us not bet on the turn in the cycle, let us not bet that companies will turn in terms of the earnings. Leverage was in play for a while in the first half of the year. That has gone away, capex was in play, that has gone away, beta has gone away, yield has gone away.

In fact, if you look at the last three months, high price to book, high price to earnings, high RoE, high free cash flow, these are the factors that have worked. So the market is already very sceptical. To me this is great news for bulls because you want a sceptical market, you don’t want a run away, irrational bull market that ends very quickly. Market is very rational in the way it is behaving. It is not applying indiscrete multiples to stocks who are going to show better performances in next five years rather than it is playing for current earnings.

Anuj: You believe the IT, pharmaceutical outperformance that we have seen over the last 15 days or 20 days or even one month that is something that can be sustained over the next few months or something?

A: That is a separate question. So what has happened is that these stocks have done very well not only 15-20 days but over the past three-four months now in various bouts and various cycles. What happens in the next year or two depends on how the world pans out — I think we should not underestimate what is happening globally whether it is geopolitics, whether it is China, whether it is the Fed cycle, these are very big events they will impact growth in stocks in India along the way and of course what the government does in order to turn the cycle.

I think so far the news has been good. I can see that people are getting a bit impatient in their conversations at least but the government has done a fairly decent job in his four-five months in power because as PM Modi mentioned at Madison Square Garden, India has a three Ds, demographics, demand and democracy. So we know that. What needs to change because we had this even five years ago and ten years ago. Nothing has inherited because of the election result but the thing that has to change is productivity.

If you look at what the government is doing over the past three-four months is intense focus on productivity. Even this cleanliness drive that comes tomorrow is all about productivity. So if you get productivity going then growth will come back and if you look at all the indicators and this is little to do with what the government has done in the last four-five months but the accumulated benefit of what we have done as a country over the past two years is that growth is slowly taking up.

So there is initial scepticism, it will be there when a growth cycle turns. There was a bit of euphoria in terms of the election, I think that has gone away. I measure it from the performance of cyclicals, from the performance of beta not from the performance of the Nifty. So I think that has probably gone away and now the market will sit back, wait for these growth indicators to continue to register upward momentum and then those stocks will come back. So I hope that answers your question. In the meanwhile, if you look at this quarter for example, healthcare will do well, technology will do well, in large parts staples will be okay so those are the stocks that may continue to deliver near-term performance because the market wants earnings eventually.



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