India Not A Small Cap Market Anymore: Morgan Stanley’s Ridham Desai

There are two geopolitical conflicts that are going on, it almost seems that it becomes a second nature. There is Fed commentary, which might have a bearing and some other factors. Oil is not the least important, of course. Would it be safe to say you still believe that it will be a domestic driven event, namely elections, which will drive what will have the most important bearing on markets for this Samvat?

India’s correlation of returns with global equities has been declining now for a few years and in fact, India’s data to EM is now down to 0.4. Defensive market in the world and if the world outlook remains fragile, then India, I think on a relative basis at least, will continue to power ahead. The absolute return cannot be exceptionally good, if the global returns are not good because remember, India is not a small cap market anymore. It’s a large market in the global context, so it cannot really be out of sync with the world. Now, the points that you raised; one, on geopolitics; it has to translate into something which matters to the Indian economy, which is oil. The two of them are closely linked. If geopolitics is not producing a bid on oil, as we are seeing right now, despite the two unfortunate wars that are happening, it’s not like oil prices are surging ahead. They are struggling to make headway and in fact, they have fallen in more recently. So, if oil remains range bound and in the searches for lower levels, for geopolitics it doesn’t matter.

What the Fed does is important because I don’t think the RBI will want to front-run the Fed. So, inflation in India is coming into the range, core is actually quite well behaved. I think some of the food price volatility will ebb as we get into the winter months. So, even the headline inflation will look pretty okay. But I think RBI will wait for the Fed to signal that it’s done, before it actually acts on the interest rates on the downward side. Now that said, because India’s growth is quite good, I think the RBI will continue to air on the side of caution and not attempt an aggressive rate cut. So, let’s see the impact of what the Fed does.

The third aspect which you didn’t raise is what happens to global growth. China is showing some recovery of growth. But all eyes are on the U.S. Can the U.S. escape a steep rise in interest rates with a soft landing? History suggests that doesn’t happen. Given the nature of the rate hikes in America, the equity markets and the bond markets, until recently, thought a recession is almost invariably going to happen. Of late, the market seems to be getting a bit more relaxed and if the Fed does engineer a soft landing, that I think will make the global backdrop quite good for India.

This is how I would analyse the global factors and then going back to your question, therefore, we come back to domestic events, which will still account for the bulk of how India performs within that. Of course, earnings, which I think will look pretty good at least in the next two quarters, and then elections, which we discussed, but we can go into greater detail.

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