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market | IST

Current trend comparable to 2003-07 bull market; expect tech, industrials to be sector leaders: Ridham Desai

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Indian market could double in the next 5 years - that is the word coming in from Morgan Stanley's MD, Ridham Desai. He discussed the market outlook and shared this views on the on-going bull market with CNBC-TV18’s Managing Editor Shereen Bhan.

Indian market could double in the next 5 years - that is the word coming in from Morgan Stanley's MD, Ridham Desai. He discussed the market outlook and shared his views on the on-going bull market, with CNBC-TV18’s Managing Editor Shereen Bhan.
“All the bull markets that I have tracked and witnessed, the closest that we come to is the 2003-2007 period. However, that's where the comparison ends, because bull markets are never actually similar. They're very different from each other and the factors are different,” he noted.
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“We were only USD 300 billion in gross domestic product (GDP) way back in 2003. We are no longer that small, we are 10 times bigger now. We are a much bigger stock market as well. We are amongst the top seven, eight stock markets in the world. So, this is a different size of the economy. It takes a lot more to move this,” he said.
“The similarities are that corporate profits are depressed. The similarities are there is some global tailwind. But then global GDP growth averaged 5 percent, I don't think we're going to get that type of average for the next four to five years on global GDP growth. Therefore, India is going to be far more idiosyncratic, far more dependent on domestic policies. Also, I think global politics has changed, we're moving away from the bipolar world, which was China, US-centric to a multipolar world and India is sitting right in the thick of these things to benefit. The government has pursued policies such as the production linked incentive (PLI) schemes, like the new labour laws and even the repealing of the retro tax with an idea to attract foreign direct investment (FDI). So, I think one of the big differences will be in terms of how much FDI we will be able to attract, which includes venture capital, which includes PE and which also includes direct investing in new manufacturing facilities,” Desai explained.
According to him, the other difference is in sector leadership. “I don't think it's going to be led by energy and materials like it was in that period, and not even financials. I think it will be led - and it's very obvious now - by technology. So, this is a very different sector leadership. I think the other sector that may lead the change is consumers. And I think industrials will also do well because we may be actually be looking at a major capex cycle. In fact, people underestimate the amount of capital investments that can take place. We have an energy transition; we have climate change. We have FDI, PLI, we have to scope things in our favour to support a big capex cycle. So, some similarities but lots of differences,” he mentioned.
In terms of government divestment plans, he said that India probably has excess labour and when one pegs wages artificially higher than the market clearing price, one basically gets inflation.
“The story goes back to 2007, at that time the corporate profits were booming, they had 7 percent GDP, up from around 2 percent five years prior to that. They were benefitting from the tailwinds of the market-oriented reforms that had happened between 1999 and 2004 and of course very strong global GDP growth. At that time, policymakers decided to make a shift, they decided that we need to take some of these profits and transfer it to the labour class and that was when Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) got enacted,” Desai explained.
“So, when the dust settled on the GFC, we got inflation; consumer price inflation (CPI) became double digit, and soon we were in stagflation. The incoming government sought to fix the inflation problem using the Reserve Bank of India (RBI) and the RBI recommended that real rate should be positive territory - and I dare say we may have actually run a little too high in terms of real rates and growth was very depressed. We lost almost 13 years in the bargain and growth remained below potential for almost a decade. Come 2019 when the GDP growth print of June came, I think the government decided it was time to move policy back in favour of entrepreneurs, risk takers, and we got this massive cut in corporate taxes, which was completely unexpected, that's September 2019. Unfortunately, COVID came in the way but that has not stopped the government from undertaking policies, which are targeted specifically to boost the share of profits in GDP,” he stated.
He believes, GDP may go back to 7 percent. “So, there's a lot of profit growth coming in the next four or five years, there's a tailwind of global macro, which is in our favour. So that's explaining why there's so much of enthusiasm in the stock market,” he mentioned.
For more, watch the accompanying video.