GDP growth will return to a higher slope curve, with policy reforms from the government, says Morgan Stanley
The government has initiated bold measures to reduce the fiscal deficit and revive private investment in a meaningful manner, according to Morgan Stanley Economics Research. The diesel price hike by Rs5 per litre and the decision to allow FDI (foreign direct investment) in multi-brand retail and aviation at a higher level are just two examples. This needs to be pursued further as given below:
First, accelerate the implementation of major public policy reforms. These include:
• Strengthening institutional capacity to allocate critical national resources such as land and minerals to the private corporate sector in a transparent manner for rapid industrialization.
• Enacting the Goods and Services Tax Act (GST)—value-added tax.
• Strengthening institutional capacity to manage the awarding of major infrastructure projects through public-private route, which should increase transparency.
• Building a comprehensive plan for energy security along with a systematic program for energy pricing reform.
• Initiating fiscal consolidation that aims to reduce the national government deficit and improve the mix of its expenditure towards development spending.
• Initiating policy measures to boost the productivity of the rural workforce and manage rural wages growth to a more moderate level matching the trend in productivity.
Second, the government needs to identify and fast-track 25-30 large infrastructure and core industrial projects: Some of the public policy reforms highlighted in the first part above are likely to take time to be reflected in the growth numbers. Hence, Morgan Stanley believes that in the near term there is an urgent need to accelerate investment growth with concerted effort to achieve it. The government could support speedier implementation of projects that are already under way, or else encourage new projects that can be taken up for execution quickly to ensure that investment activity is revived in a more timely fashion. These projects could be those that have a limited call on land and mineral resources.
Morgan Stanley believes that the government should focus in particular on infrastructure investment, which can be taken up in a counter-cyclical manner, because weak global sentiment could weigh on manufacturing investment. For instance, many Indian cities need a jump-start in critical urban infrastructure facilities and the central government could provide a capital grant of about $10 billion to initiate projects worth $40-$50 billion.
Morgan Stanley says that that in many cases the plans for such infrastructure projects are ready but they need a determined push from the central government. With the government providing leadership in policy reforms, the downside risk to growth is reduced and the GDP growth will return to a higher slope curve.
Conditions for a new bull market are slowly getting satisfied. The yield curve has stopped flattening, liquidity is improving, valuations appear supportive and profit margin expansion is a growing possibility in the coming months, says Morgan Stanley Research
Morgan Stanley has rolled out its market target to December2013 as 23,069. This implies that the market will be trading at 14.9 tines the FY14 estimated Sensex earnings in December 2013.
Morgan Stanley is expecting the Sensex earnings growth to be 10% and 19% in FY13 and FY14. Significantly, broad market earnings may have troughed or could trough in the current quarter. Revenue growth should slowly accelerate in the coming months. Margins could rise in the coming months with a favourable base effect driven by the relative movement in the current and fiscal deficit. Interest rates are already down YoY (year-on-year), and should stem the steep rise witnessed in interest costs in the previous 12 months. The risk to earnings is that the investment rate collapses, although recent signals suggest that the public sector is starting to spend money.
The \key risks are that commodity prices rise quickly, bringing inflation pressures to the fore, and global risk appetite wanes as global policy makers slip into another cycle of complacency. Mid-term polls are also a possibility, but it is not necessarily seen as a downside risk to stocks.
Morgan Stanley observes that the decisive policy action at home (reduction in subsidies and opening up of FDI) and, more crucially, concerted action by European and US central banks have reduced India’s tail risk linked to poor macro stability (twin deficit).
Accordingly, the research agency has gone underweight on consumer staples and has raised energy and materials stocks to overweight. Also, it has taken industrials to neutral. It has trimmed technology by 100 basis points. Consequently, the average sector position has expanded, and it is seen as an emerging strategy, as the average correlations of stocks to the market appear to be falling and no longer merits extreme focus on stock picking.
Anna Hazare said even if he did not enter in to electoral politics, there is a need to determine the direction of his movement and send good people to Parliament