Why Morgan Stanley Doesn’t Doubt India’s Bull Market

A bronze bull statue stands at the entrance to the BSE. (Photographer: Adeel Halim/Bloomberg)

Written by
Isha Arora
Written by

Isha Arora

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There's no reason to doubt India's bull market, according to Morgan Stanley.

That's indicated by the strong comeback of momentum stocks in April, the brokerage house said in a report co-authored by its India equity strategists Ridham Desai and Sheela Rathi. Unlike the previous two months, quality stocks lost money on a net basis (in a long-short portfolio) while growth stocks generated mildly positive results, they wrote.

Growth is about the change in return on capital and quality is about the level of return on capital, according to Morgan Stanley.

Domestic equity markets have had a volatile year. The S&P BSE Sensex fell nearly 8.3 percent in February and March after hitting a record in January. The benchmark rebounded to end 6.5 percent higher in April.

The clear winning styles in April were momentum: the stocks with maximum 12-month returns, highest positive deviation from the 200-day moving average, higher price-to-equity and book multiples, low dividend yield, high beta and high financial leverage.

“If that doesn't smell and feel like a bull market, very little will.”

Value factors continue to lose money just like in February and March. Momentum styles don't lose money in bull markets and April may be a signal that there are more legs to this rally, it said.

“Trends of the past 15 months suggest that growth stocks are making a comeback—indeed the market is detecting a new growth cycle and seems willing to back a nascent recovery in the performance of growth styles as a more sustainable outcome,” the report said. “We think this outperformance of growth over value (and quality) will continue in 2018.”

There are four ways to participate in the bull run, the report said. Invest in companies with:

Strong trailing capex.
Robust trailing book growth
Strong trailing positive earnings revisions or the best forward revenue or earnings per share growth.

The bull run might come at a hefty price though. Which is why Morgan Stanley suggests “backing growth at reasonable price.” The risk, it said, is that if the growth cycle falters, it could lead to a bounce-back from quality and value stocks.