'India Not Overvalued' — Ridham Desai Picks Sectors To Bet On
Morgan Stanley's Ridham Desai criticized foreign capital's approach to Indian markets, describing it as "tourist money" that often relies solely on headline PE ratios.
Indian stock markets are not overvalued given low inflation, economic growth prospects, and rising domestic capital deployment, according to Morgan Stanley India's Managing Director Ridham Desai.
He said the country's adoption of flexible inflation targeting has successfully brought inflation down to one of the lowest globally, consequently leading to lower interest rates. Future growth volatility is expected to be less than in the past, both in absolute terms and relative to global markets, a condition under which equity markets typically thrive, Desai told NDTV Profit.
"Adjusted for future growth volatility, Indian stocks are not expensive," he said.
He highlighted that Indian equity yields have become cheaper than bond yields, a phenomenon previously observed only during the Covid-19 period.
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Currently, the Indian 10-year yield stands at 6.2%, while the equity yield is 5%, a stark contrast to the situation in the US, where the opposite is true. Furthermore, the Nifty has been considerably cheaper relative to gold, Desai said.
He criticised foreign capital's approach to Indian markets, describing it as "tourist money" that often relies solely on headline Price-to-Earnings (PE) ratios, which he considers the "worst way to evaluate stocks" due to its convenience and ease rather than proper fundamentals.
Despite this, Desai pointed out that the Indian market has performed exceptionally well, outperforming every other large market globally.
Morgan Stanley India's top equity strategist also praised local companies for their frugality with balance sheets, which leads to superior return on capital.
Drawing a parallel, he mentioned that the Nasdaq entered "bubble territory" due to extensive buying by US households over two decades, suggesting that the Indian market is still in its early stages.
Regarding FPI flows that have recently returned, Desai explained that foreigners can only increase their holdings if domestic investors sell or if there are new corporate issuances.
"Foreigners can only buy if domestic investors start selling or there are fresh corporate issuances. I think the latter is more likely. We are going to get a lot of supply (new stock) from Indian companies in the next four years," he said.
Among the sectors Desai projects doing well over the next 12 months are consumer discretionary, NBFCs, large private banks, and some domestic-focused industries.
