Morgan Stanley said worries about a slowing global economy are unlikely to stop the flow of retail money into Indian equities as households have ample room to expand their exposure to equities.
Despite a record increase in trading by retail investors over the past eight years, Indian households remain “significantly” underweight in the asset class, with equities accounting for just 5% to 6% of their wealth, said Ridham Desai, CEO of Morgan Stanley. India Company Pvt. ltd.
Indian households save about 20% of their gross domestic product, which equates to about $700 billion a year, he said. Just a tenth of that amount earmarked for equities would add $70 billion in inflows into equities and still leave plenty for other asset classes, he said.
“We see this as something that could continue for the next two decades,” Desai said in a Bloomberg Television interview with Yvonne Man. Currently, around half of household balance sheets are in real estate and 15% in gold, with the precious metal “likely at risk relative to equities”, he said.
Desai remains bullish on Indian stocks despite the record outflow of foreign investors, who have withdrawn about $33 billion from the domestic market over the past 10 months. Retail investors are unlikely to back down, even amid concerns over the macro economy, unless there is a “very sharp drop”, he said, adding that domestic exits would likely be “temporary “.
Morgan Stanley expects the NSE Nifty 50 Index to generate double-digit returns over the next year, which should continue to drive retailer interest. In contrast, the S&P 500 index “could drop 10% over the next 12 months,” he said.
Admittedly, Indian companies faced a tough quarter through June as margins were squeezed by rising material costs. However, companies have resisted the temptation to pass the entire load on to consumers to preserve volume growth.
But with commodity prices surging to record highs, Desai said pressure on margins has eased, which could give businesses a boost.