The Economy Has Troughed, Says Morgan Stanley Even As It Lists Stocks To Stay Away From
Morgan Stanley’s 12-month calls on the economy, rupee and stocks.
The worst was over in the quarter ended June, says Morgan Stanley Research of the Indian economy. In a report that answers frequently asked questions, Morgan Stanley lays out its 12-month calls on the economy, rupee, stocks and sectors.
Economy
Stating that the lack of pickup in private capital expenditure and its impact on jobs are key investor concerns, the report insists that India has already been in a gradual recovery phase prior to November 2016 when demonetisation took place.
Indeed, underlying demand in particular discretionary consumption items, such as passenger cars and 2-wheelers, has remained strong, and this should lead to a recovery in production from August onwards. Our broader view on the cycle remains positive, and we believe that the economy will enter a period where both domestic and external demand is recovering and supportive of growth – which had not been the case in the previous four years.Morgan Stanley Research Report
It also expects a recovery in private capital expenditure in 2018.
In a separate interaction on the day of the release of this FAQ, Morgan Stanley Managing Director Ridham Desai told journalists he believed the economy has bottomed out.
Rupee
The outlook on the rupee is more sanguine. Morgan Stanley says the gains are not concerning given the lower current account deficit and higher real rates.
We think that the RBI is unlikely to tackle currency appreciation by cutting real rates, given the RBI’s monetary policy framework for flexible inflation targeting. As capital flows remain strong, think the RBI is likely to respond through further interventions (resulting in further buildup of foreign exchange reserves) and sterilisation of liquidity via open market operations, in order to save for the day when the capital tide turns around.Morgan Stanley Research Report
Equity
The research house remains bullish on equities citing several reasons
- GST rate cuts or government spending stimulus
- Strong earnings growth
- Reasonable valuation metrics (except in mid caps)
- Structural shift in household balance sheets
- Strong merger and acquisition activity
- Meaningful uptick in equity supply
- The global bull market
We also don’t think the market is pricing in a multi-year growth cycle, implying meaningful upside potential to stocks over the next 3-5 years.Morgan Stanley Research Report
The report reiterates Morgan Stanley’s overweight rating on all key retail lenders and capital-market-sensitive stocks. It says corporate lenders will act as a drag on on financials index returns for the next 12-18 months.
Staples stocks are “rich”, discretionary stocks still “attractive” especially given the likely earnings momentum, it says,
Stocks To Avoid
The report lists large-cap stocks that Morgan Stanley’s analysts rate “underweight”. These should be avoided for 12-18 months the report says.
