Morgan Stanley's Ridham Desai On Modi 3.0 Outlook, Policy Making & The Impact On Stock Markets
Summary
TLDRRhythm Desai, Managing Director and Chief Equity Strategist India at Morgan Stanley, discusses India's investment landscape post-election, emphasizing policy continuity and the potential for accelerated economic growth. He highlights the importance of lifting growth rates to alleviate poverty and the government's focus on investment rather than cash distribution. Desai also touches on the possibility of fiscal measures to boost growth, the private sector's role, and the impact of global factors on India's market. He concludes with hopes for farm law reform and increased FDI, setting a positive outlook for India's economic future.
Takeaways
- 📊 The speaker is optimistic about India's economic growth, attributing it to policy continuity and the potential for accelerated progress under the current administration.
- 🎉 The 26th investor conference is highlighted as a significant event, indicating a positive outlook for the market and the economy.
- 🤔 Concerns about the world markets being skittish ahead of the FOMC meeting are noted, suggesting a cautious approach to global economic indicators.
- 💡 The emphasis on lifting growth rates to create opportunities and reduce poverty is a key strategy, rather than relying on cash distribution which is deemed ineffective for wealth creation.
- 🌱 The BJP-led NDA government's focus on inflation control and growth acceleration is seen as beneficial for the economy and stock market.
- 🏦 The potential for a primary balance in India's budget within the next 3 years is discussed, which could lead to significant debt aging and economic benefits.
- 🛤️ The speaker is particularly bullish on the Railways sector due to its potential in reducing logistic costs and improving the efficiency of cargo transportation.
- 🏭 The expectation of a robust private capex cycle is tempered by the acknowledgment that the peak may not reach previous highs due to improved capital efficiency and a more moderate growth target.
- 📈 The composition of the market in terms of sectors and company sizes is expected to evolve, with a focus on the growth of industrials and financials over consumer staples.
- 🌐 The impact of global economic conditions, such as China's deflation and global growth, poses risks to India's market, necessitating a competitive response.
- 🚀 The hope for reforms in the farm sector, acceleration of FDI, and improvements in judiciary, bureaucracy, education, and health services are presented as areas for potential policy focus and improvement.
Q & A
What is the significance of the 26th investor conference mentioned in the script?
-The 26th investor conference is a significant event where Rhythm Desai, the managing director and chief equity strategist India at Morgan Stanley, discusses the current investment landscape and shares insights on the future of the Indian economy and markets.
How does Rhythm Desai interpret the recent political continuity in India in terms of market implications?
-Rhythm Desai views the political continuity as a positive sign for the market, indicating confidence in the administration to continue the work of the last 10 years and potentially accelerate economic policies, which he believes will be beneficial for the market.
What is Rhythm Desai's stance on the effectiveness of cash distribution as a means to alleviate poverty?
-Rhythm Desai believes that distributing cash does not effectively make poor people rich. Instead, he suggests that lifting the growth rate and creating more opportunities are the keys to wealth creation for the impoverished.
How does Rhythm Desai perceive the role of the Indian government in managing inflation?
-Desai describes the Indian Prime Minister as an 'inflation Hawk', implying that the government's policy-making is heavily influenced by a desire to control inflation, which is a key factor in their economic strategy.
What is the concept of a primary balance in the context of government finance, as discussed by Rhythm Desai?
-A primary balance refers to a situation where the government's expenditures, excluding interest payments, are equal to its revenues. Desai suggests that India could achieve a primary balance in the next 3 years, which would be a significant fiscal milestone.
How does Rhythm Desai view the potential impact of corporate balance sheets on India's economic growth?
-Desai is optimistic about the role of corporate balance sheets in driving economic growth. He notes that with pristine balance sheets, especially among corporations, and ample room to borrow, the private sector is well-positioned to crowd in as the government steps back, potentially leading to a surge in economic activity.
What is Rhythm Desai's outlook on the Indian government's approach to fiscal measures and reforms?
-Desai does not expect any major fiscal stimulus from the government in the near term. Instead, he anticipates that the government will focus on stepping back, allowing the private sector to drive growth, and possibly selling government assets to fund further development.
How does Rhythm Desai analyze the potential for private capex to contribute to India's growth in the next five to ten years?
-Desai believes that while private capex has bottomed out, it will not return to the highs of the past cycle. He suggests that the focus should be on efficiency and effective implementation, rather than sheer scale, to meet India's growth ambitions.
What are the sectors that Rhythm Desai is particularly bullish on, and why?
-Desai is particularly bullish on Railways due to the potential for significant improvements in logistics costs and efficiency. He also sees Industrials and financials as leading sectors, while suggesting that Consumer Staples may lag behind.
What are Rhythm Desai's views on the potential for technology and innovation in India, especially in the context of 'Deep Tech'?
-Desai is very bullish on the potential for 'Deep Tech' in India, which he believes is an underappreciated space with the potential to be a major growth driver for the country in the coming years.
What are the key hopes and expectations Rhythm Desai has for the Indian government's policy direction in the coming years?
-Desai hopes for a revisiting of farm laws to accelerate growth and increase per capita income. He expects a lower primary deficit and continued incentives for the manufacturing sector. Additionally, he hopes for accelerated FDI and the striking of deals with foreign companies to fill the global market vacancy left by China.
What are the main risks Rhythm Desai identifies for the Indian economy and market?
-Desai identifies risks from global factors such as China's deflation and potential currency depreciation, which could intensify competition and affect India's export capabilities. He also mentions the need for capacity creation in judiciary, bureaucracy, education, and health as areas of domestic concern.
Outlines
💼 Investment Landscape Amid Policy Continuity
Rhythm Desai from Morgan Stanley discusses the current investment landscape, noting policy continuity with the BJP retaining major portfolios. He emphasizes the market's positive reaction and the global context of slight nervousness ahead of the FOMC meeting. Desai highlights the confidence in the administration's continued work and acceleration of growth, suggesting that populist measures won't prevail, but rather growth-oriented strategies will lift the remaining population out of poverty without causing inflation.
📈 Government Fiscal Strategy and Growth
Desai explains the government's approach to fiscal measures and growth, noting that the private sector balance sheets are strong, and the government is stepping back from heavy spending. He predicts India could achieve a primary balance in three years, reducing the need to borrow for interest payments. This shift is seen as beneficial for corporate balance sheets and overall growth without triggering inflation.
🌧️ Economic Outlook and Monsoon Impact
Desai anticipates a strong monsoon, beneficial for farm output and corporate sentiment. He acknowledges the challenges in private capex scaling up to meet future ambitions but sees a positive trend with private sector capex inching higher. Desai notes that while rural distress was underestimated, improvements are now evident, and the government's focus on investments will continue to drive growth.
🏗️ Infrastructure and Investment Cycles
Desai discusses the government's infrastructure initiatives, particularly in railways, to reduce logistics costs. He highlights the continuity in railway leadership and the expected impact on the economy. Desai also mentions the potential for government asset sales to fund further infrastructure projects and the focus on sectors like manufacturing to boost economic growth.
📉 Market Composition and Capex Trends
Desai comments on the evolving market composition, with small and mid-cap companies gaining prominence. He explains the implications of efficient capital use and lower incremental capital output ratios on the capex cycle. Desai foresees robust growth without returning to previous high capex levels, reflecting improved capital efficiency and sustainable growth rates.
🌐 Domestic and Foreign Investment Dynamics
Desai outlines the dynamics of domestic and foreign investments, noting the significant role of domestic investors due to policy changes and demographic factors. He predicts continued foreign investment in India despite market constraints. Desai also discusses the potential for a major primary market cycle and its impact on market behavior, expecting a more selective stock market environment.
🔮 Hopes and Expectations for India's Future
Desai shares his hopes and expectations for India's future, including the revival of farm laws and accelerated FDI to occupy the global economic vacuum. He expects the government to focus on manufacturing incentives and reducing the primary deficit. Desai also highlights the importance of addressing capacity creation in the judiciary, bureaucracy, education, and health to sustain long-term growth.
Mindmap
Keywords
💡Policy Continuity
💡FOMC
💡Inflation Hawk
💡Capex
💡Primary Balance
💡Iore
💡Rural Distress
💡Fiscal Deficit
💡FDI
💡Investment Cycle
Highlights
Rhythm Desai, Managing Director and Chief Equity Strategist India at Morgan Stanley, discusses the policy continuity and market reactions following the BJP's retention of major portfolios.
Desai expresses confidence in the current administration's ability to continue and accelerate economic policies of the past decade.
He argues that distributing cash is not an effective method to alleviate poverty, suggesting instead that lifting the growth rate creates more opportunities.
Desai emphasizes the importance of maintaining a balance between lifting India's growth rate and controlling inflation pressures.
The government's focus on not borrowing for interest costs is highlighted as a key fiscal strategy for the next three to four years.
Desai predicts that India could achieve a primary balance, significantly impacting the government's balance sheet due to high nominal growth.
He discusses the potential for corporate balance sheets to leverage due to pristine conditions, with room for borrowing to boost growth.
Desai anticipates a shift in the government's role from spending to allowing private sector investment, particularly in infrastructure.
The importance of the Railways sector in reducing logistic costs and improving the efficiency of cargo transportation is underscored.
Desai suggests that the market composition may change significantly in the next five years, with small and mid-cap companies potentially growing large.
He forecasts that the Indian market will continue to see domestic investment growth due to favorable demographic trends and policy changes.
Desai highlights the potential for increased foreign investment in India, especially if domestic primary issuance picks up.
The discussion includes the expectation of continued support for the manufacturing sector through various incentives and policies.
Desai expresses hope for the return of farm laws to boost agricultural efficiency and India's growth trajectory.
He identifies the need for capacity creation in judiciary, bureaucracy, education, and health as areas of expected focus for the government.
Desai outlines potential risks to India's growth, including global economic conditions and competition with China.
The importance of innovation in the deep tech space as a growth driver for India is highlighted, with Desai expressing bullishness on this sector.
Transcripts
we have the man who a lot of people want
to hear uh views about on all things
possible in investing Rhythm Desai
managing director and chief Equity
strategist India at Morgan Stanley joins
us right now well on the Eve or rather
on the eve of your investor conference
and this is what the 26th investor
conference yeah and we'll talk about
that as well Rhythm but can't not start
off by talking about how do you gauge
the landscape currently after what
arguably seems to be policy continuity
with all the major portfolios retained
by uh the
BJP uh and um and and and the markets
celebrating it thus far but the world
markets uh maybe slightly skittish ahead
of the fomc so perfect timing to have
you good morning yeah good morning great
to be here it's a lovely Studio I'm
really impressed and I'm so happy I made
it here instead of instead of
interviewing in the in the Taj um yeah
no I think U there was a bit of
nervousness on tues Tuesday afternoon uh
because it seemed like we were going to
have a little bit of a problem but I
think things uh shaped up well I'm not
surprised I wrote a note overnight on
Tuesday uh that this is continuity and
just treated like a majority government
I have great confidence that this
Administration will basically continue
the work of the last 10 years and
actually accelerate things so I think
that's the message from the electorate
if there is a there are multiple
messages here there political messages
which we will not discuss because not
relevant to the market and then the
economic messages that I think there are
a few people that are still behind the
poverty line obviously there are uh that
number has gone down by 10 points over
the last 10 years but there is still you
know maybe 15% of India that is below
poverty line and to lift them and this
is where I am
counterintuitively suggesting to
investors who concluded on Tuesday that
we are now going to be back to populism
I think we're going to be exactly the
opposite to in order to bring those
people up you know Distributing cash
doesn't work distribution cash has never
made poor people Rich okay it may wi you
votes but it doesn't make poor people
Rich what makes poor people rich is you
lift the growth rate and therefore
create more opportunities and and the
BJP uh LED NDA in the last 10 years and
I keep saying is that the prime minister
is an inflation Hawk so that is what
informs all policymaking so you know the
classic example of this is co when the
world was Distributing cash this
government chose to distribute food
because cash would leave an inflation
imprint that will hurt later and you
know the fomc context is precisely there
right they're still struggling to get
inflation back to where they want it to
be um so that does not happen and what
happens instead is an endeavor to lift
India's growth rate because at 7% X
number of people get jobs at 8% that
number goes up materially so you lift
India's growth rate and at the same time
you don't let inflation pressures build
it's a very tight Balancing Act but this
is what I think the government is going
to attempt to do and then you just
imagine how bullish that is for stocks
yeah okay that's Goldilocks multiplied
by five but just sorry just wondering
though uh one followup to that M growth
impulse from the government can come in
via some fiscal measures not necessarily
reforms because reforms in the near term
in the very short term might actually
not really lead to growth stimulus in
the near term right so if indeed you do
you forecast or do you believe that
there could be fiscal impulses given in
order to boost growth because the
consensus 6 and half to no that's not
the template that template is not
government spent during covid because
the private sector retracted that is is
over now the inim budget already told us
that the government is stepping back I
don't expect any reversal in that
thinking okay that's exactly the point
the the template is for the government
to step back and let the private sector
crowd in see the private balance sheets
are pristine right now especially
corporate balance sheets 50% debt to
equity there's a lot of room to borrow
right the government has been crowding
out that because it had obviously judged
that the private sector will be
reluctant coming out of covid now that
heavy lifting is done so the government
is stepping back India is the likely
only large economy in the world the top
15 20 economies that could be in a
primary balance in 3 years from now and
you have to understand the implications
of a primary balance so just for the
audience a primary balance is when you
are not borrowing money to pay interest
cost the fiscal deficit is the total
expenditure minus the total revenues the
primary balance or the primary deficit
is what you have before you pay your
interest cost now at a corporate level
if you are borrowing to pay interest
cost you're bankrupt governments don't
go bankrupt because they print money
correct right when you get into a
primary balance and given that nominal
growth is 10 11% you get a major deal
aaging on government's balance sheet and
that has not happen in India's history
we've had 2 years in the last 75 OD
years when India had a primary balance
but it was not by design it was by uh
just uh you know luck of a very strong
economy which two which two years 2007
2008 okay huh so I mean 2007 fiscal F7
and f8 you know what the markets did in
those two years yeah yeah the mid of the
G so that is exactly what we are set up
for in the next 3 4 years so I think we
go into a primary balance it triggers a
major Rel leveraging of corporate
balance sheets and and that's how growth
gets lifted this is benign for inflation
because it's investment light see look
at the government's response
yesterday it was basically let's build
more
homes investing uh your uh revenues does
not trigger inflation it's when you when
you uh you know redistribute it that's
when you leave inflation impulses in the
system which then go out of control at
Beyond a certain time so I think the
impulse will be to trigger an investment
cycle and very uh 101 on economics is
when the investment rate is rising
corporate profit share and GDP is rising
and there's a virtuous cycle as profit
share and GDP Rises corporate saving
goes up and they invest more and all
this continues until you reach a level
where the incremental Investments become
unproductive that'll happen at one point
in time in the cycle but we're still not
there we're about halfway through the
cycle yeah so we have a long way to go
before we get there that's what happened
in
20091 Investments became unproductive
and that's why the economy and of course
there were other things that happened
because we LED inflation out of control
the fiscal and monetary stimulus was
excessive and I have this view that
manrega proved to be quite lethal
because it fueled Labor uh cost and did
not have a corresponding investment
around it and that brought double digit
inflation and was the
real foundational reason why the UPA
lost elections in 2014 because poor
people were impoverished and even though
we don't get uh annual data on poverty I
am sure that in 20140 poverty was at a
multi-e high right despite manrega see
this is what redistribu you're in fact
you're saying in in because of manrega
yeah I'm saying because of but it's not
the single reason because a lot of other
things happen around that time so I
don't expect such policy responses I
think I think especially foreign
investors as a cohort not individuals uh
you know misread India's politics quite
a lot and they don't understand and look
at yesterday's cabinet formation okay
continuity yes at an extreme level which
is essentially it's almost like the
prime minister is telling his cabinet
listen your two-month break is over
let's get back to work yeah exactly yeah
so that's you know we we we're basically
you know it's business as usual so
nobody has to learn anything new uh I
mean there are a few moves but you know
nothing dramatic so everything is as it
was and you know life goes on and
therefore they can press the pedal and
move forward now uh I know I'm not
allowing you to ask any questions but
anticipating your question there is a 50
basis points um uh room that the
government has earned in these two three
two months since or rather four months
since the interim was announced right
the base number is down 20 so instead of
5.8 it came at 5.6 and then the RBI has
given a three 30 basis points dividend
check so it'll be interesting to see
what the government does with this 50
okay I I don't think they will take the
deficit down to 4.6 because I think
that's too much of a contraction in a
single year uh the likelihood is that
the deficit will be 5 5.1 and the
remaining amount will be available for
the government to spend and I don't
think that's priced into the market
that's a lot of money actually waiting
to be SP spent in and that's good for
liquidity it's it's uh it's good for
growth uh it does set us up and if uh
the rain gods are uh you know and I
think my again my my science tells me
and I disagree with climatologist that
this was uh this was climate change this
was a ferocious El Nino which created
this heat wave in India and it is being
followed by a equally strong lanina so
come August we're not going to be liking
to come to office yeah because it's
going to be raining a lot so I'm
expecting a very strong Monsoon
hopefully it's not it doesn't cause
damage but it'll be a very strong
rainfall probably the best that we've
had in a few years so that sets us up
for good Farm output the government has
a little extra cash in its back pocket
without compromising on the Fisk and I
think you know corporate sentiment
should be good right yeah can I come
back to the private uh kex cycle uh I
think everything now seems to be still d
driven by the government capex uh Kitty
uh the private sector is not coming in a
way that we need to scale up see for the
next 5 years if we have to scale up now
it's a question of scaling up you know
we can't just say that we'll do a bit
here and a bit there do you think that
private kex is coming in a way that can
meet the Ambitions that have been set
for the next five or even 10 years let
me share the numbers with you so the
last time we had a cap pick cycle in the
private sector was the period between
2004 and 2010 right now the starting
point in 2004 was 4% of GDP which is
Corporate capex was 4% of GDP GDP was a
lot smaller then it was almost 1/8 the
current size by 2010 that number went to
17 we had never witnessed such a CAPIC
cycle in our life okay uh and Nifty
earnings in the period between 04 and 08
compounded at about 30% okay that's not
our base case right now okay for a few
reasons I'll explain those
the private corporate CAPIC cycle
troughed at 4 in this cycle again so
from 17 it went all the way back down to
4 by 20120 second quarter which was the
uh end of the or during the first wave
of covid and is now sitting at about 5
okay so it has inched higher it is now
off the lowest I think this five goes to
10 I don't think it's going back to 17
and there are reasons for this one very
important reason is India's iore has has
gone down so let me explain that iore
stands for incremental Capital output
ratio okay that is the efficiency of
capital uh that is available in the
country so our Capital was a lot more
inefficient 15 or 20 years ago so for
every dollar of growth we needed $4 of
capital okay and therefore you needed to
invest that much more in order to
generate a certain amount of growth rate
the second thing that has Chang change
is the actual headline growth rate that
the government is tonging now I have
heard this a multiple times from
government and I agree with them that
India is just not ready for 9% growth if
you try to push 9% growth then you will
trigger inflation and the growth cycle
will end like it did in that period yeah
okay now at 9% growth with iore at 4 you
need an investment rate of
36% but at 7% growth an ior which
arguably is lower than four because
India's capital efficiency has improved
for many reasons we can go into those
details but infrastructure
GST uh Financial system
digitalization internet Broadband
everything everything has changed the
incremental Capital output ratio the
amount of capital I need is a lot lower
and hence I get more bang for the same
dollar buck that I'm investing today
than I got then so if you are looking at
that cycle and saying oh we're we're not
yet there we're not yet there we're not
going to get there and yet we will have
robust growth rate now if you decide
that you want to push growth from 7 to 8
yeah and your iore is say 3.8 you will
need about 30% of gdps capital still a
good 600 basis points lower than that
time and that is reflected in my
forecast which is we're not going back
to 17 we're probably going to peek at 10
rythm uh just on follow up on that capex
question and some of the points that
you've made you're saying that no course
correction will be required in policy
but I want to link a couple of things uh
rural incomes not growing at the same
Pace the question of unemployment all of
these came up politically and maybe got
Amplified for political reasons but I'll
leave that aside the fact is that
private capex is also waiting for
consumption levels at bottom of the P
pyramid to grow to that extent every
theme we talk about is premiumization
what push do you see to make that happen
as well where you have a more sort of
secular growth rate you mean broad-based
broad-based um so uh so let me uh let me
admit one thing I think coming out of
covid we underestimated rural distress
okay so I was of the view that rural
growth should have turned last year but
it didn't and it has taken a little
longer for the impulses from Urban India
to slip into rural India so uh I think
it is happening now actually so you can
see that in corporate commentary we have
leading indicators which actually tell
us that rural growth is improving you
can see it in the two wheeler data you
can see it what consumer stable
companies reported last quarter it's
finally turned okay so that filtering of
growth down has uh has happened the
second thing which you must
understand is that the government in the
last 3 years during covid has focused
essentially on investments and therefore
the share of Investments has risen in
GDP okay now GDP con contains investment
consumption and your external deficit
okay if the share of Investments is
going up and the external deficit has
gone up down slightly consumption cannot
be at the same level it has to lose
share so on a ninal growth basis
consumption growth has trailed
investment growth and that is how an
investment cycle behaves and that will
continue to be the way it will happen
over the next uh you know four or five
years as the investment rate gains share
unless you go into a current account
Surplus which I don't think will happen
so we'll probably have a much narrower
current account deficit consumption will
lose a little bit of share investments
will gain then as the investment cycle
matures and as things Peak out there
that's when consumption comes back so
this is not the time when on a relative
BAS bases again and you know rural India
reflects most um in in the stock market
Palin it reflects into consumer staple
stocks they underperform in the 0307
cycle and their outperformance started
in febo 8 so from a stock market
perspective it's certainly not the place
to be you don't want to buy consumer
staple stocks I mean there may be pops
and trading pops and there was one last
Tuesday because everybody thought
populism is back and it was a great
moment to sell the stocks again come
back into uh Industrials which you know
took a little bit of a backseat but I
think Industrials and financials will
lead the pack Consumer Staples will be
trailing so that's from a market
perspective but I think the rural
economy is already improving at the
margin no so since we're talking about
the market perspective let me take that
opportunity Industrials you like
financials you like you talked about uh
government kex not paying at the same
levels but what about um you know your
core sort of infra spends Railways um
defense make in India all of that you
think continues at the same Pace were
you have a bullish on it no make in
India is not government spending uh
the yeah okay yeah so I'll come to that
PL continues uh probably expands gets
even more refined but the key
infrastructure sector that I would be
constructive on is Railways yeah because
that's where all the heavy lifting is
not going to happen the the Endeavor is
to lower India's logistic six cost uh
maybe by 30 40% over the next 5 years
and and therefore you know the happy
news here is that we have continuity in
the railways because the the outgoing
Minister and the incoming Minister has
already done a lot of work in the last
three years we wrote extensively about
this about 6 weeks ago about all the
changes and it's dramatic I remember we
had written a report in
2015 the average speed of a cargo train
in India then was 20 km an hour you
could cycle faster okay yeah we've
already come a long way from there okay
now that speed has doubled it will
double again so if the cargo now think
about the macro and the micro
implications if cargo on the trains is
moving faster it becomes cheaper to
transport Goods point to A to point B
importantly the inventory in the system
goes down okay so balance sheets become
better this is about iore you need less
Capital to grow your business so the
implications in the next four five years
will unfold and surprise us on to the
upside right so I if if there was one
infrastructure sector where I think the
government is going to lend greater
attention to I think it's Railways now
in the other sectors I think the
template has been set up which is the
gross spending will remain okay but the
net spending may actually decline
because the government may actually
start selling some of these assets more
aggressively to fund incremental stuff
so so you know everybody in the market
when they think privatization they only
think about government companies yeah
but you should be thinking government
assets they don't need to be
corporatized in order to be sold when
you sell a road you're still selling a
government asset you're still
privatizing something right that
activity I think will be very strong and
it will allow the government to fund the
next Road it will allow the government
to fund a host of rural roads that need
to be built where you don't get the same
economics or in fact zero economics
compared to a uh Highway and uh the
railways will get money out of the bu
so I think that's how I am thinking in a
very big picture way right yeah I I have
one question to take this back to the
market when I'm saying Market I'm not
talking about Nifty Target or sensex
Target today the market that we are
seeing is different from the market that
we saw 5 years back 5 years hence you
know a large number of small cap
companies engineering companies some of
the older ones they are all coming to
the four so what I see today the
Thousand basket thousand stocks that I
see could be different 5 years from now
so the market texture could change
completely the way we are moving ahead
Oh you mean to say in in terms of share
of market cap of various comp no not
just market cap in in terms of mix of
companies you know today a small cap
company is getting so many orders midcap
companies are getting so much orders now
some of them will would have grown so
big if they are on this efficient path
that we we are looking at implementation
and efficiency right right now so they
would look completely different so
forget the Nifty Target or the sensex
target that's PA of course you know that
math you always has been uh telling us
but the uh choice of stocks could be
completely different if you look five
years from now it's possible but as such
the composition of the market in terms
of sectors always changes from cycle to
cycle so it does not remain constant so
you know at the peak of this cycle
Consumer Staples will lose share
financials and Industrials will gain
discretionary consumption will gain a
few other sectors will lose share and
then
technology as an technology is I think
very interesting yeah so I tend to be
quite bullish on some Pockets uh on a
5year basis uh cyclically I'm more
constructive but uh technology may not
gain share May quite lose share a bit at
the Peak at the peak okay but it all
depends then of course there are going
to be a plethora of new listings and I
cannot really anti ipate uh the sector
diversity of the new listings but we are
going to get a very big primary cycle
very big one in fact it's just about to
unfold in like the next 15 days and a
lot of companies will file to raise
money and uh and uh therefore I think
the markets will be less exuberant than
they seem now because the supply will
come and therefore it will become a more
stock selective Market if if I were to
make a prediction by December uh the
Nifty will have even before before that
may have just exhausted for a while mhm
okay so um a a large primary Market
sucking out Capital but domestic staying
true to the four and that Capital likely
continuing is that the base case you
made it a few years ago it's panned out
very well does it continue part two of
my question what about the what about
the
goras see uh the domestic investors are
going to continue investing okay uh
because uh because of many changes that
have been put into place uh we created
an acronym called dream uh which stands
for demographics real rates uh and um uh
you know policy changes and education so
a lot of things have changed um the
seven you know the household balance
sheet Acres about $700 billion of saving
at the current GDP rate and if you look
at last month's number you still
annualizing at about 50 60 billion so
you've not even reached 10% of that
number right the lowest amongst the
developed World in terms of household
saving equities is Japan at 12 and Japan
by the way is now back to equities okay
so they are coming back in a big way
Europe European balance sheets have more
than 50% in stocks us balance sheets
household balance sheets have more than
40% in stocks so so we are nowhere close
so this has got many miles to travel in
fact I'm speculating that uh the
government may even allow retirement
funds to invest more today they are kept
at 15% of incremental the experience has
been awesome in the last 9 years this
was allowed by the prime minister in
2015 MH so it's now been almost a decade
and uh and I think the retirees are
going to be quite happy because they're
getting better and better returns even
though interest rates are lower the
Providence fund is able to deliver
because of equity markets and it makes
sense for a long-term fund manager like
The Provident fund to be invested in
equities that's what happened in the US
when President Reagan allowed 401K plans
to invest in stocks yeah there it ended
with the NASDAQ bubble in about 20 years
here I think it will run a little longer
our people don't age like they did in
America for a long time so I dare say
another 20 30 years to go so that's on
domestic flows now see in the market and
I say this and I get tired of saying
this there are only two cohorts right
there are domestics and there are
foreigners if you look at last month's
clip they were putting about $200
million a day into the market so imagine
if domestic funds decide that they don't
want to buy for 5 days it's a billion
dollars now to invest you don't do for
two weeks and you have $2 billion right
it's a lot of money and therefore they
have to come every day to buy stocks
somebody has to sell so foreigners are
selling now this will change when the
corporate issuer is in the in the game
so once the once primary issuance is
pick up and therefore you now have the
third cohort in the market and a fresh
seller you will find ironically The
Foreigner will come to buy so if you ask
me for a prediction next 6 months
foreigners are going to buy India okay
and I'm just tying this because they
have 5 minutes left with the investor
conference one more thing yeah please
Okay so yesterday 3 days ago somebody
asked me this question uh a client of
ours that you know currently if you look
at the Emerging Market funds foreign
investors are about 50 basis points
underweight India so India has a 177%
index weight and foreign investments
maybe around 16 16 and half so the
question was how much money does it take
for foreigners to go another 100 Point
basis points higher so slightly
overweight from their underweight and
the answer is $50 billion US oh God okay
and the problem is that the maximum that
they've ever put to work in a single
year is
35 okay so now you are stuck because
this is amongst the best performing
markets in the world you're underweight
and you're struggling to deliver
performance and uh and to go overweight
the amount of money that you need to put
is just not Fe the market cannot take
that much so what will your clients ask
you at the investor conference which
starts tomorrow because capital gains
might be in Focus you mentioned that
your Capital Market shouldn't be
tinkered with and this is what the 26th
edition of your investor confidence it
is okay so tell us a bit about the
conference yeah so we have over 300
investors coming in um and uh I think uh
we have about uh 75 or 80 companies
presenting at the summit um we have a
few macro sessions as well I have a
special session on deep Tech I very
bullish on deep Tech and I think it's an
underappreciated space and it could be a
major growth driver for India into the
next uh few years uh India actually has
never been renowned for Innovation but
what's happening in the Deep Tech space
I think will surprise a lot of uh
investors uh so uh so yeah so that's you
know what's happening it's a mix of
companies from Industrials financials
consumers uh energy uh I think we have a
bit of focus on energy transition
because that's a big theme for the next
few years I think
Aerospace uh plis um the U you know the
buildout in
infrastructure the the overall
manufacturing space I think remains a
big theme our view is manufacturing
gains share in GDP over the next 10
years and therefore services will lose a
bit of share agriculture I think retains
um so uh so the Summit is around this
the the main question that is haunting
investors abroad it doesn't bother
investors here because because uh you
know we can't put money to work in size
elsewhere right so until that changes if
we want to buy an equity asset class and
it's it's only India for foreigners the
problem is this 21 times Nifty multiple
and they're not able to digest it yeah
so there are only two markets in the
world that trade at such fancy multiples
the US and India India trades at this
multiple in my view for legitimate
reasons you have a strong earnings
growth cycle we're only halfway through
we have we have strong terminal growth
because of our demographics and our beta
to em is down to3 it used to be 1.3 so
the expected rate of return has fallen
so all this means that you're going to
trade at higher multiples in in very um
in very layman terms essentially
equities are trading closer to bonds
than emerging market equities okay
because Bond cash flows are assured you
know every year you're going to get it
right so that's how the Indian Equity
markets are behaving um at some point in
time it will become a bubble we're not
there we'll get there at some point in
time and that will be the moment to exit
the stock market the economy may still
doing be doing very well but that may
not matter because the markets could
have priced in everything but I don't
think it has happened so far so I think
that's one debate and the second is I
think investors want to get a pulse of
how Corporate spending will pan out the
question that he asked so you know what
are companies saying about their balance
sheets are they about to start
leveraging are they about to build big
capacities and and uh I think the third
thing will be around macro policy so
some insights into how macro policy will
go though I think uh we probably going
to get more momentum behind all the core
policies of the outgoing government in
this new government and that message
seems to be fairly clear over the last
few days but uh let me let me ask you as
we let you go Rhythm uh you're very very
bullish on India's future uh what are
the three things and we've seen
continuity Etc but if I were to ask you
three things that you hope to see new
and improved but from the same
government and the same team in term
three hope yeah hope to
see I'm hoping not expecting so there's
a difference between hope and
expectation okay I'm hoping that farm
laws are brought back to the table I
think for the 200 million farmers in
this country that's going to be the you
know the uh 1991 moment as it was for
the industrial sector and it will ensure
that India accelerates on its growth
path and becomes a much uh bigger per
capita income than it is
today uh the farm sector requires urgent
reform uh so that I think is one I'm
hoping uh not expecting though uh the
the other thing I think uh would be uh
and you you have specifically asked for
Hope right not expectations you can add
an expect two hope and one expect
expectations are very clear expectation
I think we're heading for much uh lower
primary deficit and probably a primary
balance in the next 3 4 years I think
we'll continue to see uh pointed in
incentives for the manufacturing sector
it'll come in a in many ways it'll come
through rationalization of GST it will
come through infrastructure build it'll
come through social infrastructure build
it'll come through plis it'll come
through various uh methods it will come
through greater
FDI um so I think those expectations are
fairly
another hope I have which is not
necessarily an expectation is that we
should strike a few deals with foreign
companies and get them home as quickly
as we
can uh I think uh we have been a little
bit uh slow on FDI relative to my
expectations so I hope that it can be
accelerated uh I think the last year or
so maybe uh you know there were other
things to attend to but now I think is
the moment for us to there is a there is
a vacancy in the world
from the multi-polar world and China
plus one and I think we can occupy that
spot quickly enough so yeah maybe these
two things two hopes one expectation no
no expectations are many I think I will
be right on most of them and they're all
detailed in my report uh in fact there
are so many of them that I lose track of
those expectations those will all come
through okay but the couple of hopes
that I have I think the FDI thing will
still come through Farm law I am not
very sure I think it's a toss Mr musk is
excited now that all is done in dusted
is already waiting but uh what an
absolute pleasure rhym thank you so much
yeah we didn't touch upon one thing
sorry do we have a minute risk factors
ah everybody should be aware this is not
a equities are not a straight line asset
class you don't get up every morning and
get a interest you know coupon in your
bank account so people should be very
conscious of that I think um most of the
risk for India are from the world I
think China's deflation is a risk
because Indian companies will have to
compete with Chinese pricing which is
going to get very competitive and even
more competitive there's a possibility
that a ren andb depreciates which will
make it harder for India to compete with
China I think we have to worry about
global growth unfortunately for India it
does not have the same Global growth
Tailwind that China had when it was
doing its jig right so India will have
to have uh counter a much slower Global
growth because the world has since then
aged and it is also far more indebted
than it used to be years ago so it's not
a very pretty world out there so I think
that's the uh second thing I would worry
about and back home I think we have and
I expect this so there's not hope but I
expect it capacity Creation in four
areas Judiciary bureaucracy education
and health now education and health are
complex because they are you know also
State subjects so it has to be the
delivery has to be at the state level
but Judiciary and bureaucracy I think
think will occupy a lot of attention in
the prime minister's office to India has
a great contract law but to enforce it
is not easy because the Judiciary is you
know is bursting at the seams and really
if you want to accelerate from 7% to say
9% growth that could become an
impediment okay well but as the note
said U this remains India's decade and
in some sense it's good to identify
risks in in in in a period which is
going to be very good for um India
Indian markets and more so R thanks for
laying it out for us and all of us here
wish you all the best for your investor
conference thank you so much n thank you
pleasure having you
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