This is a mere correction in a strong long-term Bull market. We are bullish on Banks: Ridham Desai

Most investors on Dalal Street are spooked by the savage selling seen in the last few days. However, Ridham Desai of Morgan Stanley has assured that there is nothing to be worried about. The Bull market is ongoing and this is a mere correction.

"Given that India is at the beginning of a potentially large and long growth cycle, I am quite okay with valuations. They are not extended or too cheap. At this point in the market cycle what matters is the growth cycle rather than valuations. We are at the mid-cycle stage; the early pickings are done when the valuation re-rates in anticipation of higher growth. The next stage is likely driven by growth rather than multiple expansion. This is like a mid-bull market type of correction. The global growth tailwind will not be as strong as it was in 2003-2007," he said in a soothing manner.

As regards the valuations, Ridham stated that it is not correct to compare India with the other Emerging markets but has to be seen relative to India's own history. On a price to book basis, India is kind of on par with history, he said though the ROEs (return on equity) are below history. The market is anticipating a new ROE cycle. The ROE will probably get to around 20%. He also pointed out that the GDP growth number has averaged nearly 9% between 2003 and 2008 but it is unlikely to deliver the same type of real growth and that also impacts ROE.

Very Bullish on Banks

Ridham stated that the banking space is their largest overweight position because in the next 12 to 18 months, banks could probably end up being the best performing sector. In banking, we have improving credit growth, falling credit costs and potentially rising NIMs (net interest margins) as rates go up, he said.

He also explained that discretionary consumption looks very strong because there is a revival in jobs and wages, and there is also pent-up demand coming out of the Covid lockdowns.

He also pointed out that the environment for banks is sweet because the rising rates help their margins, credit costs have suddenly peaked, they are falling, and there could be write back of provisions as well.

"It is a sweet environment, banks should do well in terms of earnings, valuations look attractive so we are very bullish on this sector, it is our top pick and I think for the rest of this year as well as going into the next year banks should do quite well," he stated.

As regards IT stocks, Ridham cautioned that the valuations are still not cheap despite the recent sell-off. He explained that their growth profile has shifted so they ought to be trading better than history especially if you take a 10-year period. If you take a 25-year history, then it is okay because they had gone into bubble territory at the end of the 90s. The correction reflects the concerns that both the US markets and Indian tech stocks have expressed about a potential US recession or a material slowdown in growth, he said.

As regards the infrastructure sector, Ridham opined that the stars are aligned for a major revival in India's manufacturing sector. The sector has lost share in GDP persistently over the last 20-25 years. A lot of things have changed in the last few years. We have competitive tax rates and corporations are looking to diversify away from China on an incremental basis and looking to come to India to set up production facilities. The government is trying direct cash incentives to companies to invest in India. Manufacturing would be the thing to watch out for in the next ten years, he observed.