In an interview to NDTV’s Prashant Nair, Ridham Desai, MD of Morgan Stanley, India, gives his views on how the year 2010 will pan out for the ordinary investor. He speaks about which sectors to invest in and which ones to avoid in 2010.
NDTV: In 2010, which sectors to buy?
Ridham Desai: I think we are moving out from an early cycle to a mid cycle. In the early cycle, it’s really, In India, the consumption cycle that does well. Consumption is the one that picks up pace to start with and as we saw in 2009 that consumer stocks, notably consumer discretionary stocks like autos, have done extremely well and they have been darlings of the market.
As you go into 2010, I think you’ll have to shift to mid cycle. I think it will be the banks that will stand out, so my top sector picks really will be banks. If you were to go to the next sector that I like then its probably energy. The reason is slightly different. It’s largely because energy has been one of the worst performing sectors in 2009 and I think a lot of those reasons are ending as you go into 2010. Energy correlates positively with short term needs and we expect short term needs to go up, as I said we expect central bank to hike successively over the next few quarters.
Energy correlates positively with industrial growth and industrial growth is accelerating. Energy correlates positively with crude oil and if really you look from a macro prospective, one of the key risk factors for India is the crude oil prices going up and you can hedge that by buying energy. So there are a lot of things that I think are in favour of energy. The valuations are ok, they are not stretched and I think the earnings growth may surprise on the upside.
So banks and energy and industrials, I think, should do well because as I mentioned, I think the output gap will be closing in the second half. I think you will see a recovery in the private capex. In the first half we’ll get a recovery in infrastructure capex and in the second half we’ll see a recovery in the private capex. I think the orderbooks of capital goods companies will be quite strong and they should do as well. Probably in the second half of 2010 more than the first half, but I think industrials could end the year on a strong note. It forms, what I call the late cyclical, in the market. So, I think 2011 will clearly be a year for the industrials, but we will surely see some performance coming in 2010 as well.
NDTV: Any more names apart from these three areas and what are the sectors to avoid?
Ridham Desai: I think the fourth theme we have for the year is that as industrial growth accelerates, the bias of growth will shift from rural India to urban India. Urban growth will start accelerating as industrial growth rises, so urban growth has been lagging rural growth. So within the consumption basket, you move out from rural plays into urban plays. Rural plays have done very well, for eg, the two-wheeler stocks. I think you will find the media, which is now catching the market’s attention, will probably do very well in 2010. I think the carmakers will continue to do well in 2010. But some of the large caps staple stocks, some of the two-wheeler stocks, on a relative basis, will give up performance to the urban consumption. On an absolute basis, they still should be ok because as I said rural growth is still very strong. So the biased growth shifts to urban India, that’s the fourth theme that we play. In terms of sectors you avoid, I think one particular sector that we are little worried about is technology. The sector has done extremely well, a lot is in the price, it’s become a very popular sector, a very crowded sector. If the central bank starts tightening, the rupee may start bearing upward pressure. I don’t think that’s in the price of these stocks, so no doubt US growth is picking up, which is good for this sector. But at the same time, the rupee may face upward pressure. So that’s a sector you would want to lighten up more, particularly if you have been holding it for the last six months. There’s a lot of money investors have made and they may want to lighten it up in favour of some of the other sectors.