India Equity Strategy - Ridham Desai

New Delhi: Ridham Desai of Morgan Stanley says the market continues to fight a wall of worry and they see triggers on both sides for a major move & markets as per them seem poised for heightened volatility and higher correlations with likely moderation in relative returns post India's stellar performance in recent months.

Talking further on the worries of investors he says there is so much that can wrong in the coming months & including a deep and broad US recession leading to slowing earnings, a melt-up in the US$ resulting in pressure on the Balance of Payments & further aggravation of the Ukraine-Russia war with a concomitant rise in oil and fertilizer prices leading to elevated inflation and higher rates, headwinds from rich relative equity valuations and strong trailing relative performance and rising equity return correlations with the weak global equity market.

Absolute returns in the Indian markets are likely to remain modest as they have been since October 2021 & relative returns too could be peaking as correlations across stocks may have made a trough but continue to signal a market driven by macro warranting wider sector positions.

They at Morgan Stanley are 'Overweight' on Financials, Technology, Consumer Discretionary and Industrials and Underweight all other sectors. In terms of the market, volatility could be high in the coming months as the market negotiates global headwinds.

Talking about the weapons that the Indian market has in this fight against this Global uncertainty Ridham adds that a) A structural rise in the domestic equity saving pool which could get a further boost from an upward revision in equity allocation for retirement funds b)A boost corporate profit share in GDP which is leading to a mean reversion in earnings and could be aided by a CapEx recovery, and c) a focus FDI flows which raised the share of FDI in BoP allowing India to run monetary policy that is less sensitive to the US Fed and reduced the equity market’s sensitivity to US growth conditions and oil prices.