The 'Party's Just Begun' for Indian Stock Funds, Morgan Stanley Says

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  • Financial savings still 9% of GDP, lower than 14.5% peak
  • August saw record inflows to and purchases by domestic funds

Morgan Stanley's Agarwal Sees India Opportunity

The recent flood of cash into Indian stock funds is just the beginning, as the nation’s savers chase equity returns amid diminishing appetite for gold, property and fixed income, according to Morgan Stanley.

“We’ve just started, the party has just begun,” said Ridham Desai, managing director at Morgan Stanley India Co. India’s total financial savings are still low at 9 percent of GDP compared with a peak of 14.5 percent about 8 years ago, and the government’s push for pension funds to invest in stocks should drive flows even higher, Desai said at a press conference on Wednesday in Mumbai.

Inflows to local equity funds have remained positive for 17 straight months, starting in April 2016 and reaching a record 204 billion rupees ($3.1 billion) in August. This gush of liquidity has provided a buffer against outflows sparked by the risk-off sentiment across Asia.

Domestic funds have been net buyers of shares for 14 straight months, with purchases in September totaling 138 billion rupees. Foreigners, on the other hand, have withdrawn from Indian equities for a second month amid valuation concerns and after recent data showing a soft patch in economic growth.

The S&P BSE Sensex trades near a seven-year high even after the gauge Wednesday capped its longest run of losses in 2017. Valuations remain elevated as company earnings have been hit by the disruption caused by November’s shock cash ban and the introduction of the goods and services tax in July.

At the same time, money has poured into equities amid falling interest rates on bonds and as demonetization discouraged cash investments in property, a tradition route for avoiding taxes.

‘Not Stretched’

Still, Morgan Stanley believes that Indian markets aren’t very expensive, and expects economic growth and company earnings to rebound.

“If we look at Indian stocks relative to the interest rates and relative to other markets, the valuations are not at all stretched,” Desai said. “We are sanguine about earnings as the dust settles down on GST in the next 12 months. It’s possible that the government’s revenue collection exceeds targets, setting the stage for higher spending that will be eventually good for growth.”

Morgan Stanley estimates earnings for Sensex members will rise 11 percent in the year to March 2018, and 19 percent in the next financial year. It sees the economy growing at an average 7.1 percent annually for the next decade.

“India has successfully institutionalized equity savings, and the domestic flows have stood the tests of disrupting events such as demonetization and the GST,” Desai said. “I don’t think the structural nature of these flows will change, though there will be cyclical ups and downs.”

— With assistance by Ravil Shirodkar

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