India’s Next Market Phase

**Chetan Ahya** (0:00)
Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.

**Ridham Desai** (0:05)
And I'm Ridham Desai, Morgan Stanley's Head of India Research and Chief India Equity Strategist.

**Chetan Ahya** (0:11)
Today, the biggest takeaways from our India Investment Forum in Mumbai.
From the shifting outlook for India's markets and flows, to the sectors driving the next phase of corporate earnings and capex. It's Friday, June 12th at 7 p.m. in Hong Kong.

**Ridham Desai** (0:27)
And 4:30 p.m. in Mumbai.

**Chetan Ahya** (0:30)
Ridham, Morgan Stanley's India Investment Forum took place in Mumbai last week, and I was there with you. These events are a great opportunity to speak with investors who come across from the globe to attend.
Now that we have had a few days to process the conversations, what stood out to you? What was the biggest shift in investor sentiment that you picked on?

**Ridham Desai** (0:53)
So Chetan, I think it's been the case of a continuing story about India.
Domestic investors look that they are bullish and foreign investors continue to stay rather cautious on the Indian markets. We could see that in the overall attendance. In contrast, I think domestic investors were looking for the next stock that they wanted to buy. They were seeking opportunities and there was a lot of interest in meeting companies. Before we get into markets, let me turn back to you from a macro side.
India's growth story remains strong, but relative growth appears to be cooling. This is in contrast to markets like Japan, Taiwan, Korea and the US. How should investors think about India's macro positioning in that context?

**Chetan Ahya** (1:42)
So Ridham, when I look at the macro data in India, they're all indicating a meaningful upside in the growth trend. So I'll just cite two key cyclically sensitive macro data points. One is the banking system credit growth, and number two is the auto sales, particularly the passenger vehicle sales. So bank credit growth is growing as of the last bi-weekly data point that we got. It's growing at 17.7% year on year, and car sales are growing at 27% in the month of May. But as you were mentioning earlier, the relative growth opportunity is a challenge for India. And to just share the numbers on the earnings growth for the first quarter that we saw across the region, we saw Korea's earnings growth at 170%.
We saw Taiwan's earnings growth at 48% year on year, Japan at 33%.
The US has seen a growth of about 27% year on year. So in that context, when India is reporting 13% growth, it's becoming a challenge for investors to look for opportunities in India related to other markets. They say that they are more focused on the other markets than India. So let me come back to you, Ridham. Staying with the investment implications, India projects stable valuations and strong corporate earnings, but its relative growth advantage has narrowed. How should investors reconcile this contradiction?

**Ridham Desai** (3:12)
If I go back 35 years, as long as we have the MSCI index series, and as far as I have been in this industry, this is the lowest relative multiple that India has traded at. And indeed, growth last year was weak, but if you see QOQ, we have started to accelerate. The broad market earnings growth trajectory has shown a doubling in the quarter-ended March over the quarter-ended December.
But it underscores the point you made about the relative growth complex. It's clearly not in India's favor. And a lot of the capital in the world is short-term oriented, and it cares for what growth is going to come in the next quarter or two.
And that's the state of the market right now. However, what I would say is that equities is a quintessential long-duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much. It remains far superior to a lot of other countries around the world. And therefore, I think this does present itself as a great opportunity for a long-term investor, while the markets are digesting this relative growth disadvantage that India seems to have over the next, say, three or four quarters.

**Chetan Ahya** (4:28)
And Ridham, another theme from the forum was policy action to attract capital. Policy makers announced a number of measures right as our conference ended, and they aimed to withdraw withholding tax on debt investors, also providing banks with an incentive to take up more dollar borrowing.
How central are these measures to sustaining foreign inflows into Indian markets?

**Ridham Desai** (4:53)
I think the measures taken by policy makers are very important, probably amongst the most important policy actions this year. The removal of taxation on debt investors will make a difference.