Samvat 2080 Second Half Can Be Volatile Due To Lok Sabha Election: Morgan Stanley's Ridham Desai

The outlook for Indian equity markets remains positive for the next 12 months, but the second half is likely to be more volatile as investors focus on Lok Sabha election, according to Ridham Desai, managing director of Morgan Stanley India.

"I do expect a pretty good first half," Desai told Niraj Shah in BQ Prime's Diwali special Saal Mubarak show.

The base case is that the market will assume that India will vote in a majority government with continuity, he said. "If the elections produce an outcome that is not in the market's favour, then I think we could get a pretty significant drawdown."

India's economic growth prospects stand out in the global landscape, making it an attractive investment destination. Despite near-term challenges, the medium-term earnings outlook for the companies remains positive, according to Desai.

The quarter ending December will be quite strong for many reasons, with the ICC Men's Cricket World Cup and other factors at play, he said. "So, we should actually end FY24 on a pretty good note then."

"We are set for a golden period in India's performance both on the macro as well as the stock market," Desai said.

Desai highlighted that India is attracting long-term capital allocation. "What investors are struggling with is the headline valuation."

The relative case for India remains strong. The absolute returns will start looking less attractive as they have been for the past few months, but in the context of what the world has done, the Nifty is looking very good, according to Desai. "If the world outlook remains fragile, then India, on a relative basis at least, it will continue to power ahead."

In a global economic downturn, India's economy is likely to perform better than its peers. However, if the global economy recovers and growth stabilises, the country has the potential to make an absolute upside case, Desai said.

He highlighted that the election outcome might have some bearing on how earnings shape up.

If there is an adverse election outcome, then there might be some restraining of corporate sentiment and investment spending, which may then start affecting earnings in the next financial year, he said. "If the election outcome is in line with what the market wants, then I think we should be good, FY24 will also be another strong year."

India does not compete with China for flows. The emerging market basket has been struggling in large part because of China and emerging markets have not been getting flows, according to Morgan Stanley's managing director.

Desai said that unless emerging markets as a basket receive flows, India will not get its fair share or even less than its fair share. "India is not a small emerging market; it is one of the biggest emerging markets," he said. "So, for India to get emerging market flows, the emerging market sentiment has to turn."

"So, ironically if China starts doing better and if that causes sentiment towards emerging markets to do better, then flows into India will improve. They will not actually deteriorate," Desai said.

As multinational corporations seek new markets for production and consumption, India stands out as a globally attractive destination. With its vast consumption potential and ability to deliver large-scale manufacturing.

"India will find favour among MNCs for further investments. That is not going to change even if there is a slight shift on the US and China front. So, China being well is not a bad thing for India" he said.

India is in the midst of a recovery in capital expenditure and that could last for a few years, led by private investments. The current government's focus on infrastructure development and capex marks a significant shift from the previous governments' emphasis on subsidies and consumption-driven growth strategies, according to Desai.

"Cyclical capex may continue until the corporate capex spending becomes more entrenched and then, it will give way for corporate capex spending and the government can retract some of the spending that it is doing," he said.