In December 2012, Ridham Desai of Morgan Stanley had advised investors to buy stocks with the promise that they would see a 25% gain in 2013. He repeated that promise in April 2013 and exhorted investors to “buy aggressively”. He said that while there would be pain in the short-term, the gains would be “outsized” in the medium to long-term. He also made it clear that the Morgan Stanley Model Portfolio was “massively overweight” on Banking stocks.
Interestingly, Ridham Desai’s “buy aggressively” call had come as a counter-blast to Shankar Sharma’s “Sell Now – Doomsday is coming” call.
Today, just a few weeks later, Ridham Desai has thrown in the towel and changed his stance. He is now advising investors to sell stocks at every relief rally and run.
In his latest interview to CNBC-TV18, Ridham Desai defended his change in stance by arguing that “What has changed since May is that the world’s reserve currency has told us, it is no longer interested in funding our Current Account Deficit (CAD). Until then we were having a party because the world’s reserve currency was happily funding us because they had their own set of problems. Once they decided they don’t want to fund us, we have to fix our CAD”.
Ridham Desai explained that the RBI had no elbow room in the short to medium term to lower interest rates because if it were to do that, there would be a flight of capital from India to the US (where the interest rates were increasing due to the tapering of the quantitative easing (QE)) and this would lead to further weakening of the rupee. Also, the consumer price index is at 9.7 percent reducing the scope for a lowering of the interest rate even further.
Ridham Desai also pointed out that a similar thing had happened in 1998 when the RBI had hiked interest rates to tackle the Asian currency crises. It took three long years before the interest rates could be lowered, he said.
He added that today the equity yield is 7 percent while the bond yield is at 10 percent. There is a negative 3 percent gap which meant that either the bond yield had to go down or the equity yield had to fall. If the equity yield has to fall 3 percent that is almost a 20-25 percent knock on equity share prices, he emphasized.
So, the bottom-line is that Ridham Desai is of the view that valuations are not cheap and more downside is in the offing. So, if you want to sell your shares, you may do so at every relief rally that you see.
With this move, Ridham Desai has joined the camp of Shankar Sharma who was the first to predict the great Bear Market.