Morgan Stanley Picks 14 Indian Mega-Cap Stocks As Likely Winners
Three reasons why Morgan Stanley’s Ridham Desai and Sheela Rathi are betting on these 14 stocks.
Growing inflows from foreign markets coupled with increasing domestic fund flow and investments in Indian Exchange Traded Funds will put the focus on India’s large liquid companies, says a Morgan Stanley report.
The country continues to gather more weightage in the MSCI Emerging Market Index as it leads its peers with a 7 percent growth rate. This will attract "large opportunistic flows" into the country which will be searching for the biggest names to invest in, said Morgan Stanley's Equity Strategists, Ridham Desai and Sheela Rathi in the report.
Domestic institutional investors, also seeing a gain in funds, earlier banked on medium- and small-cap companies to derive their growth - a viable strategy when domestic funds were a small relative to the market. With changing proportions, institutions such as mutual funds will look for bigger names within India Inc.
The third reason the report cites to evaluate mega caps is the likely growth in domestic ETFs.
ETFs are likely to see their assets grow 30x in the coming decade to $200billion by 2026. From a relatively small size of $100million in 2009, ETF assets have grown to $8.2billion in size in a span of eight years.
Morgan Stanley expects provident funds to channel further funds into equities via ETFs and that trend will underscore the growing importance of mega and large caps for India.
Morgan Stanley's lists 14 stocks as mega-cap winners including Bajaj Auto Ltd. HDFC Bank, Infosys Ltd. and Mahindra & Mahindra Ltd. Private sector banks and discretionary consumers stocks dominate the list being "most attractive at the current point of time in the cycle".
The report clarifies that the call on mega caps does not negate that small- and mid-cap stocks may still outperform large- and medium-cap stocks in the next three to five years. However, "the growing size of domestic mutual funds implies that they may not be able to repeat their historical excess returns by buying a handful of mid- and small-cap stocks".
The Case For India’s EM Index Weight To Rise
Morgan Stanley says, “we see India's weight in the MSCI EM index continuing to rise in the coming years.”
- India's index weight still lags behind India's GDP.
- While India ranks among the top three in the EM basket in terms of GDP, it barely makes it into the top 15 in terms of index weight.
- Part of this underrepresentation problem is India's smaller free float. But India's foreign free float should also rise as new securities get listed and enter the index.
- As India index weight rises, it will probably attract more non-long-term money, or 'tourist flows'.
- Such flows will mostly look for large cap, liquid names through which to participate in the India story.
Why Indian Mutual Funds May Need To Shift Strategy
Morgan Stanley says, “domestic mutual fund assets could catapult to $1 trillion in the coming decade from $100 billion currently”.
This the report attributes to India currently entering an "equity saving ascent" which is cyclic and structural in nature. Prompted by demonetisation, citizens are slowly shifting from physical assets such as gold to financial assets such as mutual funds. The favourable change in demographics, positive real interest rates and better growth prospects point towards higher savings.
Morgan Stanley expects equity savings to double to 1.4 percent of GDP by FY2026.
“The heavy lifting for this super liquidity cycle is likely to be borne by domestic mutual funds,” the report says, estimating a Rs 14 lakh crore ($216 billion) inflow in the coming decade as compared to $45 billion over the past 10 years
The reports points out that historically mutual funds have allocated 40-50 percent of their funds to mid- and small-cap stocks helping them outperform the benchmarks.
But the growing size of mutual funds will make it difficult for them to continue the outperformance by buying just mid caps.
What Will Fuel The ETF Boom?
Morgan Stanley expects, “ETFs could accumulate $200 billion in assets by 2026 – thirtyfold growth from today's level”.
This the report predicates on rising provident fund flows. It cites the increase in allocation to equity investments by provident funds - from 5 percent in 2015 to 10 percent in 2016, and 15 percent in 2017. And expects it to rise to 20 percent. It notes that this flow is directed into equities via domestic ETFs.
Risks
The report caveats that its stock-picking approach relies heavily on its analysts' forecasts. It also lists other risk factors such as
- A lengthy global recession, or local government actions that could impede growth.
- Uncertainty in politics and policy, specifically a stable tax regime and positive real rates.
- Any change in the prevailing benign outlook on inflation.
