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  • Exclusive Interview: Ridham Desai, Head of India Equity Research & India Equity Strategist, Morgan Stanley in conversation with Surabhi Upadhyay and Anuj Singhal on CNBC-TV18

    Published on May 23, 2020

    Q: Is the market also seeing some kind of tectonic shift? The texture of the market is changing, money moving from financials into pharma, digital stocks, telecom stocks, your thoughts?

    A: I need to first set the backdrop and then I will come to this very specific point that you raised. The backdrop is that COVID-19 has evinced a very strong fiscal and monetary response the world over and it is quite unprecedented, the world has never seen such a response. Even during World War II, in the aftermath of World War II, we didn’t see such coordinated policy response either across geographies or across agencies – so government and monetary policy getting together.

    Even in the Great Depression there was no monetary policy. So this is very unprecedented, it is multiple times more than the stimulus that was put in post global financial crisis of 2008-2009. When we come out of this, all the stimulus that is waiting to kick in, it is going to create a ferocious bull market around the world.

    What is required is essentially some comfort that the worst on COVID-19 is over or more appropriately that we have a vaccine or a cure. So when the world starts sensing that we have one of these two things, I think this money is going to move into asset markets and equities particularly. So we have to brace ourselves for that. I cannot time it in anyway, I don’t know whether it is three months down the line or it is going to take six months, that we will have to see and I even don’t know whether we will make a double bottom before that, come back to revisit the March-end lows or not, so lows are imponderables because they depend on how COVID-19 progresses.

    The news from around the world is encouraging. In a lot of places where it was threatening to create more casualties, it has now come down. So let us see. That backdrop is in our minds that there is an unprecedented stimulus that has been put in place which is waiting to find its way into this markets as well as the economy once confidence returns.

    Coming back to your question, I think world markets are created on the back of new sectors all the time. So in the mid-90s it was energy then it was consumer staples, at the turn of the millennium it was technology, then it was a bull market, it is energy in India that led the bull market – one specific stock in fact – and then we got this big bull market in financials and it has lasted really long. It has gone on for 7-8 years and it has created some serious marketcap in the financial space particularly in non-banking financial companies (NBFCs) and in private sector financials.

    I dare say that when financials hit 30 percent of Nifty’s marketcap in February, we may have marked a peak in that cycle. So when a new bull market starts and maybe one has already started and March 24 was the day when we created the bottom in the market, I think financials may not lead the way and the leadership may shift. It may shift to consumer discretionary, it may shift to healthcare, it may shift to energy or it may shift to telecom, it is likely to shift to all the sectors.

    That doesn’t mean that we don’t get big rallies and particularly after what has happened to those stocks over the past four-five weeks, we should always be prepared for big bounce backs. I think the leadership of the next bull market is going to be different. We are betting on consumer discretionary followed by healthcare and to some extent energy and that is what we think will lead the next bull market but let us see.

    Q: I know you don’t talk stocks but for example you have seen big decline in names like PVR or a Jubilant Foodworks, a lot of these names, a lot of restaurant stocks have fallen a lot, consumption names have fallen a lot, the big concern which is being raised is that even while there might be a pent-up demand, the way we approach things post COVID-19 will be different, so in that sense what part of discretionary consumption do you think would lead this big rally that you are talking about?

    A: That was a very important follow-up question. Here is my analysis. So far, India has come away relatively unscathed by COVID-19 and as a consequence I don’t see permanent shift in consumer behavior, so as the company opens up and as things go back on stream, consumer behavior will revert to where it was in February. So a lot of these businesses that are being affected because of the lockdown, because of social distancing, will come back. They may not all come back together and there may be some gaps, some may come back immediately, some may take three-six months and some may take even 12 months. However, the point that I am trying to make here is that I don’t see permanent shifts in behavior because we have not been affected as much.

    Even though it is tragic to talk about deaths, the fact is that we have not seen that much of fatalities around COVID-19 even though the disease is still evolving in India and we have not seen the peak, given what has happened thus far, given the low testing yields that India has had, given the low fatality, given the high recovery rate, it seems less likely that we will suffer the same fate that several European countries or even the US have suffered. So maybe in those countries there will be a permanent shift or a more lasting shift from COVID-19 and there will be shifts in business models, in India I think we may not see those shifts and they may be rather temporary in nature.

    The other sector in the consumer discretionary space which appeals a lot is autos. I think autos has gone through a big downcycle and in several sub-parts of autos, demand is where it was in 2013 or 2014. So this is really depressed. There should be a lot of pent-up demand that may come to the fore in 2021 or 2022 and even if you just replace the cars that were purchased in 2013 because now those are 8 years old, a lot of those consumers will be back to replace the cars. That itself should drive a pretty strong recovery in passenger vehicles and even in two-wheelers. So I think that is another space and then of course if autos is doing well then the auto component on these should also do well.

    So frankly if you are asking me this question, I like almost every sub-sector in the consumer discretionary space, I don’t see much disruption happening in India. For the disruption that was anyway there in place pre-COVID which was technology related, some of that may persist but I don’t see disruption relating to COVID-19 persisting for more than 6-12 months.

    Q: I must play devil’s advocate so allow me this question and I want to go back to the bigger call that you have made that a bottom has been made. Where is the conviction coming from because one could counter argue? The bears will argue saying stimulus in India has been underwhelming, bears can argue that our numbers, the rate of infection is still spiking pretty high and we have different issues like congested cities etc. so where is the optimism coming from?

    A: I was actually on your channel the day when we had made this call that we may have hit the market bottom that call was premised largely on where sentiments and valuations were then, so we did hit a very big trough on valuations and sentiment around that last week of March. That is when I thought that share prices may have made a bottom. One never knows these things, we can always revisit that, I hate to use any one bear market cycle as a template, but just for argument purposes if we used the global financial crisis as a template the market made a trough in October 2008, rallied sharply and then came all the way back to the October 2008 levels within kissing distance of that level in February of 2009 or somewhere in early March 2009.

    In six months we came back to that level and then we started a very big move which went on for several months. So it is not to say that this market will follow that template. Every market has its own behaviour pattern, so one can never be absolutely sure that a bottom has been hit. But at those 7,500-7,600 levels of Nifty we get to valuations which are so attractive that I think it compels us to say that maybe this is the bottom. So that was where the confidence came from, it was not on the bases of where COVID-19 was going to head or where India’s growth rate was going to go -those are issues that get resolved much later.

    Markets make their bottoms well ahead of economic cycles so we should not get into the business of forecasting economic cycles when we are trying to call market tops and market bottoms so that is one point. The second point on your question on the fiscal stimulus, the jury is out on this and it is also something that I am debating in my head. The phrase that I have heard from various government sources is that the fiscal package will focus on affordability and not on need. I think precisely that is what we have seen. The government has conserved the fiscal room maybe with two things in mind. One is that it saved some bullets for firing later on and second is that it actually conserves India’s macro stability which may also be as important as stimulating growth.

    Now if you assume for a moment that COVID-19 has not had such a big impact on India then I think this strategy may actually end up working unlike the western hemisphere where COVID-19 has been very disruptive because of just the scale of the disease. Now having said that it is very clear that the lockdown is creating a lot of pain and therefore my view is that the biggest stimulus that we can get is to come of the lockdown and that is what is happening right now.

    We are without making a great fuss about it slowly walking out of the lockdown. So trains are restarting, airports are restarting, stores have reopened and I think over the course of the next two or three weeks if we can bring the large parts of the economy back into working conditions then in itself should be a good enough to pull India out of this. Then what we need is stability, which is still not there, let us not make any mistake about that, but we need that to come back and then I think the economy will look little better.

    This quarter is a wash out and there is no doubt about it, the next quarter will also be a problem, it will not be smooth, but I think the second half could be a whole lot better.

    Q: Just to extend that argument a little bit more, you had this migrant labour issue, don’t think they are going to come back in a hurry. There have been so many job losses. Yesterday we spoke about Ola and there are so many startups where we have seen some problems. This is going to impact the demographic dividend as well. At some point do you think this will hurt or as you said this is going to be just 3-6 months factor?

    A: On migrant labour I think clearly there is going to be some issue, but it is important to get into the numbers. Because what we get to see is only pictures which are very depressing of people stranded on highways and trying to walk home and struggling on very unsafe transportation in an effort to get back because they don’t have roof to live under or a meal to eat. So keeping that humanitarian aspect aside and I was just seeing some numbers that were quoted by Manish Sabharwal – yesterday or earlier today -that only a fraction of the total migrant workers in India actually moved back home. By his statistics and I don’t have those statistics, I am using his statistics without his permission, but it is only 2 percent. It is a very large number, it is a million people, but it is only 2 percent of India’s total migrant workforce. So in India these numbers can get very misleading because we can see a lots of people on the highways, thousands of people but they may not add upto significant portion of our workforce.

    I have had this view all along that we will actually comeback quite quickly. Why, because a lot of these people want to start working. You see by not throwing cash at them, by not giving then cash in their bank accounts what the government may have done is basically ensure that we comeback quickly because after all this people need living to make and the only living they have is the job that they have. So the minute they sense that their jobs are back I think they will be back. So that is my current optimism. We will see how that goes.

    Just one note of caution that I will give here is that over the past few days we have seen a bit of a spike up in the cases. Actually the metric that I am using is testing yield that is the number of positive cases to the total test that we do. Now India’s testing yield has been amongst the lowest in the world and that has basically suggested to me that we have not really suffered a spread in the disease. So the testing yield is average 4 percent since the onset of the disease. At the bottom it was 3 percent in April today it is at about 5 percent, so it has climbed from 3 percent to 5 percent during the month of May and this has coincided with the movement of people. So as we have started opening up and people started moving around the testing yield has gone up.

    We will keep a very close watch on this because we don’t know if this is a beginning of a new trend or it is just a temporary thing. I hope it is temporary I can’t say this for sure. But this testing yield keeps going up then I think we will have a problem going into June, so keep a watch on that. The story on COVID is not over, it is still there in the picture and we should not forget that this is a virus that we don’t know really much about so we have to keep an eye on that.