Start of a new profit cycle driving a multi-year bull run: Ridham Desai

The equity market is in a multi-year bull run as the economic impact of the Covid-19 pandemic on India is likely to be transient, said Ridham Desai, Head of India Research at Morgan Stanley. In an interview with Sanam Mirchandani, ahead of the Morgan Stanley Virtual India Summit, Desai said mid- and small-cap stocks are likely to see a pause in the rally, while large-caps will make a comeback. Edited excerpts:

You have a target of 100,000 on the Sensex. Any changes to that after the pandemic?
That Sensex target was for 2025. We’re still far away. What we have learnt about the pandemic is that its economic impact is transient. There is no permanent economic damage. There is massive coordination between central banks and governments across geographies. When we walk out of this pandemic, there will be a very sharp bounce in economic growth everywhere in the world.


Markets are at new highs. Is it time to reduce equity exposure?
We are in a multi-year bull market. This market has many more legs before it gets exhausted. The fundamental premise is that we are at the start of a new profit cycle. This comes from a big shift in government policy that started in September 2019. Over the next 3-4 years, companies could compound profits at over 20% per year. We are overweight India in our emerging market model portfolio. There are two risk factors we need to bear in mind. One, the system inflation coming from the US. The Fed is going to wait and let inflation overshoot or go up before they react. Two, we have to keep an eye on our domestic policies and watch out for reversals.

Which sectors are likely to lead the earnings recovery?
Domestic cyclicals will beat those facing outside because India is likely to beat the world in terms of growth. We prefer cyclical sectors like industrials, financials and consumer discretionary.

Is there more scope for mid- and small-caps to rally?
If you take a six to12 months view, there is a rotation that will likely happen in favour of large-caps because small- and mid-cap stocks have done very well over the last six months. They will take a bit of a pause in my view, and large-caps will make a comeback. They have significantly underperformed since the start of the year. If you take a 4-5 year view, small- and mid-caps will continue to do quite well.

Would you recommend buying consumption stocks at this point?
Rural India has a lot of tailwinds. We are probably heading into another bumper agriculture year. No doubt they have taken a bigger hit during the Covid second wave, but I think they will bounce back as strongly as urban India. Auto, auto parts, travel, leisure, and even home upgrades are likely to see pretty good performance once the second wave settles.

Will there be additional pain for the banking sector?
Banks are past their worst point. There will be some loan losses because economic activity has been constrained, but I don’t think they will be significant, and a lot of those may also prove to be transient. Conservative banks will regard lack of collection as a temporary loss, make a provision for it and then see if recovery happens down the line.

What is your outlook for real estate stocks?
I would be quite bullish on residential real estate space. You should see a pretty strong pickup in the volume of residential sales. Pricing may not immediately go up because there is still inventory. But once the inventory is drawn down over18-24 months, I would expect pricing to improve for developers. Commercial real estate is a mixed bag. We are not seeing major cancellations of office rents. Once the pandemic dust settles and we go into 2022, there will be firms that will evaluate how much office space they need. There may be some redundancies there.