Ridham Desai Picks Sectors To Tap Amid Near-Term Challenges

Large private banks, consumer luxury, information technology, as well as cement, are some of the pockets to buy from amid the near-term pain in the markets, according to Ridham Desai, managing director and chief equity strategist India at Morgan Stanley.

The market has transitioned from a bull market to stock picker's market and there are plenty of areas that look attractive, the market veteran told NDTV Profit's Niraj Shah in an exclusive interview.

The Morgan Stanley MD is bullish on large private banks and said they will have a stellar Samvat as regulatory environment favours them, but he suggested avoiding midsized banks.

Consumer luxury is also expected to see a major revival after a soft patch, he said, while noting that rural recovery will surprise to upside. However, he recommends being careful in sectors which have lot of competition, like quick commerce.

He is long on IT services, as the cycle is turning and AI is promising, according to him. Desai is also bullish on cement as low margins are not sustainable, he said, recommending caution on global material stocks.

According to Desai, the recent slowdown in India's growth, which is hurting the stock market, is plainly on the lack of government spending and a revival is important in the upcoming Samvat. Frothy valuations of small-caps and mid-caps, as well as bunching up of IPOs, which are taking some appetite of secondary markets away, are some of the other factors contributing to the correction, he said.

However, neither of these are structural issues, according to Desai. "We are still in a structurally bull cycle and the earnings cycle has another 3-4 years to go," he said.

We are not at the end of bull market, but its a typical bull market correction which will take weak ends off the market, which will emerge much stronger after this, Desai said.

Desai pointed out that the country's growth slowdown is down to three things— shifting of shradh period, which has made on year comparison distorted; strong showers in the month of August, and government spending, which is a lingering problem.

The market veteran explained that government expenditure comprises of 12% of GDP and has fallen 1% year-on-year. It is very hard for the remaining 88% to overcome when its growing at 10-11%. "People say it's urban-rural slowdown, but it is plainly lack of government spending," he said. While lower expenditure in first quarter was attributed to elections and August and September to rains, he expects the data to improve in October.

From this point, if the government has to go back to its fiscal deficit of 4.9%, government spending for the remainder of this year has to be of the magnitude of 20-25% year-on-year. "If they manage to achieve that, markets are in for a very big surprise," he said.

To further aid growth, besides government spending, Desai said it is important to cut GST rates, as income growth is doing well. But he also noted that this will create a challenge for revenue of the states, as they can't compensate it with sales tax.

The execution of government infrastructure projects also matters, Desai said. If an interesting development happens in farm sector, he would be very bullish.

Desai said the non implementation of the farm laws was a big disappointment, as they held great promise for the sector which poses a long term risk factor, with 38-40% of workforce producing only 15% of output. "If these laws come back through fiscal incentive for states, it will be a rabbit out of hat."

While central bank's policy is not a major market mover, the national consumption expenditure survey, which is underway, is critical. This is because a new CPI basket will come out, in which, food will have lower representation, Desai said.

The Indian markets will not be impacted by global factors, as much as domestic factors. People have attributed the markets falling to China stimulus, but it is only coinciding and domestic growth slowdown is hurting the market more, said Desai. The impact of stimulus is done and dusted as it disappointed the market. Chinese stocks have sold off since then, but India has recovered, he said.

He called China policy action good news for India, as sinking of the Chinese economy will be a pain for the whole world. "China may not have done enough to lift economy from deflation, but just enough for now, to not cause another round," he said.

On US elections, Desai said that he doesn't think it has much bearing on India in one-year horizon, except if US market goes through a sizeable correction. "The election may have bearing in 3-4 year basis, depending on what new president choses to do," he said.

Similarly, on the middle east situation, he said oil is less important for India than it used to be. "Oil intensity as a percentage of our GDP has declined by 60% over last 10 years," according to Desai, but at the same time he noted if oil prices went up a lot in very short time, it will bring pain.

Meanwhile, according to him FIIs have been struggling with India valuations and they have been wrong. "It takes time for them to digest," he said, while noting that in comparison with other emerging markets India is very expensive.