Investment bank Morgan Stanley has raised their September 2019 Sensex target to 42,000 from 36,000 earlier amidst expectations that the growth in Asia's third biggest economy will pick up in the coming quarters.
Ridham Desai, India equity strategist at Morgan Stanley, spoke to CNBC-TV18 about the next year
Sensex target and reasons behind the optimism.
“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 I think 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 I think 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 I think everybody is focused on those risks, which is usually a good time to engage in stocks when people start disregarding risk, that is when I think you get worried," said Desai.
Desai expects corporate profits to witness recovery from hereon. "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 going to likely to witness a very sharp recovery in corporate profit margins over the next two-three years."
With regards to the
US tariffs on China, Desai said, "There are lots of caveats and I hate to forecast on points and single digits or single numbers, which of course makes a lot of good media but is very bad way of looking at things. It is certainly not a good framework to think about investing in stocks. So the Sensex target is what it is. I don’t think we should overly focus on this but I believe you made some really good points. Let us step back for a moment and think about exactly 12 months ago. If somebody had told you that the rupee will be at 72-73 per dollar, that oil will be where it is right now, that the 10-year will be at 8.2, that we will have all these tariff stuff happening around the world, what do you think you would have done with stocks? That is the point. 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 round because the market already knew that it was coming."
According to Desai, market isn't feeling any panic or exuberance right now. "So I will make one more comment which is that the market is usually right, it goes wrong about a couple of occasions out of 20 and when it is wrong, it is essentially either over-exuberant or it is in panic. So we can recall such things quite easily, January 2008 was over-exuberance, March-2009 was panic in fact all of the end of 2008 and early 2009 was panic, we had 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. So I would argue that stock prices are more accurately reflecting all these concerns than we can fathom. Therefore, I wouldn’t worry about these things,” he said.
“The stuff that is going to upset the view on the markets or the performance of stocks is something that we actually don’t know that is going to happen in the next few months. All the stuff that we know that is going to happen, I think, is already baked in the cake,” said Desai.
“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 mistake by policy-makers in India, so so many things can go wrong and that is true about stock markets at any point in time but I think we have to weigh those things against what could happen to fundamentals where the valuations are and on balance, it looks like we are in an uptrending market give or take a few points here and there and 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 higher not lower,” he said.
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