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India on recovery path that may translate into better earnings growth
Ridham Desai, Head, India Equity Research, Morgan Stanley
Sep 21, 2018 | Source: MINT e-paper
We have been in a bull market since 2009... I think it is now reaching a stage where it is going to get backed by strong fundamentals. If the market starts getting too pessimistic, then it is a buying opportunity. If it gets too optimistic, then you sit on the side-lines.
On upgrade in Sensex target: I think India is on a growth recovery path, which began a few months ago. It is likely to translate into better earnings growth and that is the reason why we think stocks are going higher. We have been in a bull market since 2009, it has been a very long bull market, but it has been a very slow one. We have had several corrections along the way, and the bull market is now reaching a stage where it is going to get backed by strong fundamentals. Obviously, there are a lot of risks along the way and everybody is focused on those risks, which is usually a good time to engage in stocks. When people start disregarding the risk that is when I think you get worried. However, for now, I think growth is looking good, likely to surprise on the upside, profit sharing gross domestic product (GDP) is at near all-time lows. So, I think we are likely to witness a very sharp recovery in corporate profit margins over the next 2-3 years.
On interest rate risk and political risk affecting markets: All this is already in the bag, we already know about this, stock markets are forward-looking animals, they have already baked this in the cake, which is why we are getting such a muted reaction this morning to the additional tariff, because the market already knew that it was coming. The market is usually right, it goes wrong on a couple of occasions out of 20. And, when it is wrong, it is essentially either over-exuberant or it is in panic. We can recall such things quite easily. January 2008 was over-exuberance. March 2009 was panic, or in fact all of the end of 2008 and early-2009 was panic. We had a similar panic in August 2013. I think everybody can identify panic and over-exuberance. The market doesn’t feel like that right now, it doesn’t feel like it is in panic or it is in exuberance. I would argue that stock prices are more accurately reflecting all these concerns than we can fathom.
On potential risks: Certainly, there are risks. Election results can go all wrong for India, we can get a global recession, we can get a mistake by the Fed, we can get a mistake by policy-makers in India—so many things can go wrong and that is true about stock markets at any point in time. But, we have to weigh in those things against what could happen to fundamentals where the valuations are and on balance. It looks like we are in an up trending market, give or take a few points here and there. Will the Nifty correct over the next few days? Quite possible. However, I think over the next year or two, it is likely that stocks are going to go higher not lower.
On election results affecting markets: That is going to be a tricky one because it is very hard to tell how things will pan out with respect to the elections. What our historical analysis shows is that it is not the nature of the government, but it is actually the leadership at the top that matters to the economy and, therefore, to the market. It is not about what happens in May next year, but what the market starts believing will happen, and that is what is ultimately going to drive share prices over the next few months.
On timing the markets: I think time is more important than timing. We did this analysis on the Indian stock markets going back 25 years. 100 days of returns account for almost two-thirds of the aggregate index returns. So there have been about 6,000 trading days in the last 25 years and a 100 days, which is less than 2% of the total time, has accounted for more than two-thirds of the total returns that the index has given. It is important to spend time rather than time it even for the most, the biggest experts out there. It is very hard. We believe that performance breadth will widen from here. So the winners of the past few months or past few years are going to take a bit of a back seat.
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