'Party Has Just Begun' For Indian Stock Funds, Says Morgan Stanley

The S&P Sensex index is trading at 20 times projected earnings for the current year,

 the highest level in 7 years

The recent flood of cash into Indian stock funds is just the beginning, as the nation's growing savings chase equity returns amid decreasing 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. Pvt. The nation's total financial savings are still low at 9 percent of the 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 Indian stock funds have remained positive for 17 straight months, starting in April 2016 and reaching an all-time high of 204 billion rupees ($3.1 billion) in August. In turn, domestic funds were net purchasers of Indian equities for 13 consecutive months, touching a record 179 billion rupees in August.

This liquidity has helped offset the negative impact from overseas investors, who are poised for a fourth straight month of net selling in September amid valuation concerns. Sentiment worsened after the latest quarterly GDP data showed that the economy grew at the slowest pace in more than three years.

The S&P Sensex index is trading at 20 times projected earnings for the current year, the highest level in 7 years, and higher than the S&P 500's multiple of 19 times. Part of the reason is that Indian corporate profits have been hit by India's decision to replace 86 percent of its currency bills in November as well as the introduction of a new national goods and services tax (GST) in July. At the same time, money has poured into stocks amid low interest rates on bonds and declining appeal for property and gold in the wake of demonetization.

Still, Morgan Stanley believes that Indian stocks aren't very expensive, and it expects a rebound in economic growth and company earnings.

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

Morgan Stanley estimates earnings for Sensex companies will rise 11 percent in the year ending March 2018 and 19 percent in the next financial year. It sees the country's economy growing at an average 7.1 percent annually for the next 10 years.

"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."

(Coutesy Economic Times)