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Believe demand will see a sharp pick up by next quarter, says Ridham Desai of Morgan Stanley

Updated : September 23, 2019 01:08 PM IST

Ridham Desai, the managing director of Morgan Stanley India, spoke to CNBC-TV18 about the government's move to cut corporate tax and what this means for the market and the economy.

“We have to appreciate that this is a permanent relief on taxation. So, it alters the free cash flow of corporate India to eternity. So, we must appreciate that upfront. It is not a one-time thing that happens say this year or next year and then it is over, it completely changes the comparative dynamics and I think it will eventually lead to a much more robust private investment cycle,” Desai said on Monday.

Speaking about the private investments, he said, “If there was one factor that was ailing India’s growth rate, it was the fact that private investments were falling every year for the past 8-9 years after peaking at 17 percent in FY10. It had declined to 6 percent last fiscal. I think these announcements, particularly that discounted 17 percent tax rate for new manufacturing units that go on stream by March 23, I think has the potential to lift the private investment cycle.”

On the demand issue, Desai believes that demand will see a sharp pick up by next quarter. “My own diagnosis is that the demand problem came from a very tight monetary policy. Last year in June, GDP growth had peaked, nominal GDP growth peaked last year in June. Subsequent to that peak, the central bank hiked rate twice. The central bank obviously did not know that the GDP growth had peaked, they were holding that view at that time that GDP growth is accelerating, but now we know that it did not accelerate. So you were hiking rates in a slowing economy.”

“It was not until February that the central bank actually started reversing its actions because growth actually slowed down. It takes for these monetary actions to gain a foothold into the economy. Over the past six months, we have seen 110 basis points of rate cuts and we are due for another one in October and we have seen interbank liquidity going into positive territory. To my mind, the cumulative effect of that will feed into demand. So, I am a little less worried about its impact,” he added.

From a portfolio perspective, Desai said, “We prefer midcaps over large caps. We certainly prefer value over quality and momentum. I think value ironically, its performance depends on a recovery in growth. When growth is sluggish, when it is bad, people tend to go to those companies which have more resilience and those happen to be the quality companies. Now I think value comes back; and domestic cyclical over defensives. So these are three strategies.”

“We continue to be overweight consumer discretionary, overweight industrials where I think there should be more appetite now because I think people will start thinking about recovery in private capex, and large financials. However, I would also look at real estate, I think there is a clear possibility that real estate turns in the next 12 months. I think select NBFCs will start looking good after what has happened. We continue to be underweight technology which was very painful for us through the year, but we have held on to that. I guess we should make some money out of that. We are underweight on pharmaceuticals and we are underweight global materials because I think this is not really global, this is all domestic,” he added.
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