High uncertainty leads to high returns; eye on US policy
Ridham Desai, Head-India Equity Research Morgan Stanley
Dec 23, 2016 | Source: CNBC TV 18
Point of high uncertainty is also equal to point of high return : Despite uncertainties surrounding the economy right now, Morgan Stanley expects double-digit earnings growth next year
Equity more valuable than bonds: In terms of duration, cash flows from equity exceed duration of cash flows from bonds which are limited to 10 years. By that logic equity should be more valuable than bonds
Indian growth trajectory: India’s growth trajectory has turned positive and going into 2017 the external sector has seen an improvement and global trade is off its lows, Desai says. From a Nifty perspective 45 percent of earnings come from outside India and this is a better environment for growth, albeit uncertainty on depth and breadth of currency exchange (after demonetization) as well as from US policies.
Post demonetization: On normalization of economy post demonetization, not all of the Rs 15-odd lakh crore should necessarily return to the system to stabilize it considering lot of cash was even earlier stashed away and not in active circulation. Return of even 50-60 percent of the total is enough to settle things.
Concern of sequencing of U.S policies: Despite the positive outlook, a lot matters on the sequencing of US policies. If corporate tax rate cuts and infrastructure spending promised by the new President Elect Donald Trump comes first then the negative impact of likely tightening on trade negotiations will get deferred.