With Indian markets rebounding nearly five per cent from recent lows, Prabhat Awasthi (bottom, left), managing director & head of equity, Nomura India tells Puneet Wadhwa that the valuation-wise, the markets look more attractive now and should do well in the remaining part of the year. Though the pace of growth has been a disappointment, India still remains a large over-weight for Nomura in the regional context, he says. Excerpts:
What is your interpretation of the latest statements from the US Federal Reserve and developments across the euro-zone?
The latest statement was a bit dovish and that's why we have seen a big rally in the equity markets and the 10-year bond yields in India. It is not going to be a clear road ahead given the uncertainties existing in the global economy. Even our currency strategists globally think that the lift-off that was expected in September has come into some amount of question.
Could events related to these two economies put global financial markets under stress during the remaining part of the year?
Though the full-year is difficult to predict, but in the very near-term we think that there would be some relief. Our belief is that even a Greek exit situation would not eventually have as negative an impact as is feared due to limited exposure of banking sector to Greek debt.
How does India look within the emerging markets? Which other markets, in your opinion, are likely to fare better and worse than us over the next 12 months?
Our regional view is that we remain bullish on India in the overall context and it is a large over-weight for us in the regional context. So far India is concerned, we think that there has been a lot of underperformance this year, partly given the fact that India had outperformed massively last year.
Secondly, the Chinese markets saw a huge rally because of which there was a shift of money from India to China. All this has resulted in India's year-to-date performance being negative compared to other markets that have done extremely well.
We believe that fundamentally things are still improving and especially after the correction, the valuations have come to a level that makes the markets more attractive. For the remaining part of the year, we think that the Indian markets should perform well.
You had a December 2015 target of around 33,500 for the Sensex. Have you revised estimates?
We still hold this view and have not revised our estimates. We see no reason to revise it downwards.
What are your projections for corporate earnings growth FY16 and FY17?
We don't forecast but work on consensus numbers. For FY16, we expect a growth of 15 - 16 per cent and a similar number in FY17.
Are foreign investors come to terms with the fact that the earnings growth will be gradual and the pace of reforms / policy action could be a lot tougher to come by contrary to earlier expectations?
I think they have. The expectations they had earlier have been tempered and is largely visible in how the markets have behaved and within markets, how the market constituents have behaved. Though the markets have been flat or range-bound, there are stocks that have done much worse, especially in the cyclical space like public sector (PSU) banks etc.
More than reforms, growth has been a disappointment. It has been both the aggregate numbers of earnings and the growth aggregates that have disappointed compared to expectation got built that the government came to power. Markets have already been priced in a lot of these things by now.
What are the likely triggers and risks for the markets from hereon and what is the probability you attach to these events materialising over the next 6 - 12 months?
The growth picking up itself will be a trigger. There are high chances that the growth numbers will start looking better as we go forward primarily because all that has been done in terms of policy will start to have an impact. The government's fiscal process which was a drag on growth will reverse. The investment cycle should also bottom out sometime this year.
Investment cycle would have continued to decline as we saw a massive decline in new projects that corporates were planning and the impact is this is visible with a lag effect. So the bottoming out of investment cycle that the market thought would be a one process year post the new government coming to power is actually likely to take about two years.
The investment cycle cannot move quickly even if the government pushes all the right buttons. Based on our analysis we believe that we are now close to the end of the bottoming out process and we will likely see a growth revival towards the end of this year or early next year. The markets being slightly forward looking will anticipate that and this should act as a trigger for a positive move.
Of course there are external events which affect the markets like the decision by the US Fed on interest rates, monsoon etc and these could act either ways on the market. However, the positives which we believe will most likely come through are growth-related.
What's your view on the infrastructure space after the sharp correction we have seen in the markets from the peak levels?
We like the space overall. There have been individual stresses in the infrastructure space, which in some cases could be due to poor judgement wherein sponsors have taken too much risk too quickly and then have not been able to get out of it given the build-up of leverage on their balance sheets.
On the other hand, there have been companies that have been prudent enough in terms of managing risk. So one cannot generalise this as there are a number of sub-sets within the infra space that includes power, roads, railways etc. There is action picking up in some sectors like railways, mining and roads. One needs to be careful while evaluating the investment opportunity in each of these spaces.
What is your outlook for the banking sector in the light of the recent results, especially the public sector banks given the NPA (non-performing asset) overhang?
There are obvious stresses here and these could get sorted out in two ways. One, the government provides capital - and it seems that the government is now getting committed to providing more capital. Secondly, a pick-up in credit growth and demand recovery through a cyclical recovery in the economy could also improve balance sheets of banks. The assets side grows and the NPAs then are less of an issue. If growth picks up, some of these NPAs cyclically start to get better. Usually this process will take two - three years to play out after recovery.
All said and done, this time around the credit standards of PSU banks were much more relaxed compared to private sector banks. And therefore it opens up a window of opportunity for private banks to take market share, which we think is happening.
While the distress may reduce in the PSU banks, their ability to take market share is much lower in this and the next cycle. Their growth will therefore lag system growth. Having said that, there are some banks within PSU bank space that have better credit quality compared to the overall system.
Do you think that the NPA's could be understated?
We have done a fair amount of work in the banking sector on the basis of granularity and on account-by-account basis. We think that there could be more slippages from the restructured assets and there will be some more accounting admissions, but give or take two - three quarters, things will start to improve.
When do you see the RBI cutting rates again and by how much? What is your overall sector positioning?
Our economy team's view is that there will not be any more rate cuts and the bulk of cut in rates is already over. We remain overweight on automobiles, banks, cement, industrials, oil & gas, IT and utility sectors. Our underweight sectors include consumer, media, metals & mining, pharmaceuticals and telecom sectors.