Morgan Stanley has highlighted 14 Indian mega and large cap stocks that are likely to enter the $10-billion club in the next three years. The mega cap list is dominated by private sector financials and consumer discretionary. Ridham Desai and Sheela Rathi, who authored the report, said that domestic exchange-traded funds (ETF) are likely to grow 30x in the coming decade to $200 billion. “We argue that domestic ETFs are likely to see their assets grow 30x in the coming decade to $200 billion by 2026. From a relatively small size of $100 million in 2009, ETF assets have grown to $8.2 billion in size in a span of eight years,” said the Morgan Stanley report “We expect ETFs in India to gain further traction, as provident funds are likely to continue channelling their investments in equities via ETFs. All these trends point to the growing importance of mega and large caps for India,” the report added.
As Indian stocks gain weight in the MSCI EM index, the market will attract tourist money and bigger flows, which will look for large liquid names to invest in. As India’s domestic institutions grow in size, they will no longer be able to rely on mid- and small-cap stocks to generate outperformance. Making the right mega- and large-cap call may become crucial to generating alpha.
According to the report, India is under-represented in the MSCI EM index relative to its GDP in the EM world. As the index weight rises, foreign flows will get larger, and the equity market will also attract more tourist money – larger quantities of opportunistic flows. This will result in the search for large liquid names.
For Consumer Discretionary, strong consumer loan growth, positive real incomes and a jobs recovery is driving a positive view. Banks are flush with liquidity, which should help a loan growth recovery in the coming months. While margins are under pressure for corporate banks, retail banks, non-banks and property companies look fine on the margin front. Credit costs may also have peaked, given a rise in M&A activity and a recovery in economic growth.
“Over the longer term, the expanding household balance sheet augurs well for both sectors, as households leverage more than before to advance discretionary consumption and drive loan growth, especially for non-banks and retail banks,” added Morgan Stanley report.