Prabhat Awasthi of Nomura Financial Advisory and Securities remains positively baised on Indian equities and feels margins in
Indian equities outperformed other emerging markets (
Below is the edited transcript of his interview to CNBC-TV18.
Q: Hellish kind of June. How are you feeling as the market steps into the next phase? Is the poison of the global issues behind us? Or that could linger in the next few months?
A: Tough to say. But one round of adjustment in the markets in terms of absorbing the news of what Federal Reserve (Fed) has been saying has been done. So, we have seen fair amount of outflows from capital markets including debt and equity.
A large part of it is behind us and the market seems to be getting focused more on back of the domestic news and the news flow rather than just adjusting to a new regime in terms of bond yields in the US and the Fed tapper. So, may be a large part is behind us now. Hopefully, we should move forward from here.
Q: Last couple of months, the Nifty has behaved in a very volatile fashion ranging between that 5500 to 6100. Because of the movement in terms of news flow, would you change your year end target for the markets now?
A: No, we are continuing to stick with it. Firstly, we were not overly bullish. We were looking at Sensex target of 21700, which is not a huge upside but our bias was positive due to the margins in India changing for the better.
So the volatility was essentially caused by external events globally because that Fed came and said what it said. Given the fact that Indian market is more vulnerable to currency because of the current account deficit (CAD) like in the past, we saw volatility.
Volatility is a part of the nature of the game especially when global events change very fast. However in terms of India’s own domestic issues, we have probably seen the worst; not that it is getting out of the woods completely. So, from here our bias will remain positive. But we were not overly bullish to begin with. We are not overly bullish now.
Q: The bigger concern is whether Fed statements have caused a rest in how asset classes are perceived. Does it still make sense to be in EMs versus being in the mother market, the US the way the bond yields have been shooting up and the kind of correction in other asset classes? Has something changed in terms of the way people perceive asset classes? Is there is a complete reset going into the next couple of months?
A: While people might say that this is a new reset, but the market performance is already reflecting in the clear outperformance of developing markets versus developed markets.
Every market trades on its own fundamentals. The global cost of capital is obviously determined by global events. Ultimately, every market and a market like India will trade on its own fundamentals. So the earnings trajectory here in India, the GDP growth, the reform process will be priced in.
In the short-term, changes in cost of capital and perception of capital cost, perception of bond yields in US and their movement will reset the market. From there on the market is driven purely by its own fundamentals.
Look at June for example. India has really outperformed dramatically the other EMs. And the markets, despite fear at 5600, have moved up once some of these fears have moved away.
So, the Indian market won’t continue to underperform. There is a new emerging trend. I personally don't believe in that. There might be resets. But you move past them and move back to the domestic fundamentals.
Q: So you would approach this month with a buy mode? Or is there a still a lot of global turbulence? Is it best to sit on your hands for a while?
A: It depends on market valuations. The market was looking fairly attractive at lower level. Even now they are not too bad, they are not over priced. They are trading at a discount to long-term average, probably lower than where they would settle.
So we will still be buyers of the market and the market is in best spot when there is fair amount of negativity. So markets were well priced 5-6 percent lower. But our bias on the market is still positive.
Q: There is a high degree of vulnerability to flows. It has happened in the past few years where macros and earnings performance have been very poor. But the market has eked out strong returns purely because of the quantum of money that we pulled in. How heightened is the risk for the market at this point in terms of a sharper outflow? What does the currency seem to be indicating? The rupee has been far more bearish than the market has through the course of the last two months.
A: This was pointed out before. Frankly, rupee is now not behaving hostage to the fact that we were funding our CADs with massive short-term capital inflows. We opened out the debt markets to short-term flows. In the last 12 months, affair amount of short-term capital has been amassed.
We have actually received less Foreign Direct Investment (FDI), less ECB compared to the CAD. We have plugged in the gap with much more volatile flows. So, the rupee will tend to be high beta and will behave in the short-term with volatile swings. We saw the same swing last year this period. Rupee depreciated suddenly and came back a bit and settled down.
Our bias on the rupee is still on depreciating side. But the volatility might have gone to the other side. This volatility is part and parcel of investing in India because of past funding of current account has been through capital flows. At the margin, our economy has slowed down.
Demand indicators are clearly very slow. We have seen poor auto, cement, and steel demand. That should actually improve the CAD somewhat. If the domestic demand is weak your CAD will improve.
On the top of that the fiscal deficit reduced and global commodity prices fell. So, on a prospective basis, there will be improvement in CAD. So what you are living through is the past issues and you are paying back for that.
For there will be volatility but that doesn’t take away the fact that fundamentally things are beginning to improve on the external front.
So I won't worry too much of rupee completely killing the returns from here. Given that it has already depreciated a lot. There could be outflows for sure. But look at the history in India and the worse outflows in a particular year, we have seen is probably close to USD 500-700 million.
Even more may be but a part of that was because of the short-term outflows which came out which went back. So I don't know how much outflows we will see as India still remains reasonably high potential growth market even if the growth rate is slower.
The opportunities in developed markets are high but in the rest of the EMs they continue to look even more shaky. We have seen what is happening in China; comparatively India is actually improving as we have seen structural and fiscal changes.
So I won't be to worried about a market falling 15-20 percent because the outflows pick up pace. I don't think that our fundamentals at the margin are such that it warrants that kind of outflow from the market.
Q: The economic data that from the past couple of weeks would it take longer for the revival of the investment cycle? The Purchasing Managers' Index (PMI) data indicates that new orders are at a four year low, the auto sales refuse to recover. Do you think this process will get protracted the revival of the investment cycle?
A: Absolutely. This has been one of our key worries on India in the past. Investment cycle is long drawn and you need to know clear evidence of whether they reviving. So the sectors, which are driving investment cycle, are obviously weak.
We have seen hardly any new projects being planned. Metals are down in the dumps because of the global cycle. So number of sectors which actually have driven the investment cycle have run into issues which are structural in nature. Even if you correct those structural issues like in power that we are tempting to do, the cycle doesn’t reverse immediately.
Because even if you announce a plan or a project today, it will take one-two years before it starts hitting the ground. So the break in the investment cycle that we have witnessed over last two years will continue to way down actual investments in the country.
So it is not a short-term process. It is a long-term pain. To that extent, you will have to live with slower growth for reasonable amount of time.
Fiscal contraction is also weighing down on growth. The diesel price hikes, electricity price hikes will actually pinch consumer, he will spend less. So growth headwinds are plenty and to expect a very quick recovery will be putting cart before the horse.
We will probably go through a period when our inflation consolidates and interest rates consolidate at a lower level and then the investment cycle starts to respond to the policy changes.
But it will take time. I don't think it is going to happen in the short-term.
Q: What would you do with a stock like Tata Motors where JLR’s numbers have been superb but the domestic business remains a lemon and now there are some chinks opening up in China as well?
A: We are neutral on the stock because of the reasons you mentioned. The domestic market commercial vehicle (CV) business is more a play on industrial cycle and growth and it will continue to remain weak. It has been surprising every month negatively and that bleed will continue for some more time.
At the same time China picture is looking gloomy. It is one of the reasons why the electricity car industry globally has done so well. Clearly the risk in China has been rising. There is a very good chance that growth will disappoint in the second half.
So even though the JLR valuations don't look tough, the company is doing well at this point of time. Giving the clouding of the future in China and the domestic downside that you are seeing in the business the stock will be range bound.
Q: You are neutral on Titan Industries. What have you made of this near collapse of gold as an asset class through the course of the last three months? Do you expect to see more collateral damage on these stocks and businesses that source from there?
A: This is a macro play and unfortunately the government is clearly focused on reducing gold sales and all the participants in the industry will be affected. Now the essential issue is that in short-term there will be pain. In the longer term, the branded players will survive this through.
It probably will be investment demand which will be more affected by what the government is trying to do that probably is the motive but in the short-term nobody gets out. It is a great company. They have done a wonderful job in creating brands, businesses.
But they also cannot escape the overall industry downturn which is rather engineered because of the macro issues that the country is facing.
Q: After being dormant for so many months Reliance Industries has started to move now after that gas price hike. How are you positioned on Reliance now and what kind of a range do you think that stock could portray?
A: We are buyer of the stock. It is a stock in our model portfolio. That tells you that we are positive on the stock. It is because of the flat earnings period that Reliance was experiencing for a while and the lack of triggers is probably coming to an end. So it is an overweight in our portfolio.
Q: On the banking space, you have many buys from the front liner credible names. Just take us through what your approach is towards the banking space itself. Will it will be one of the pockets that will aid the recovery or the pullback in this market?
A: Our view is that macro stresses that India has faced are remaining. While we are not very bullish on growth, we are definitely bit more positive on inflation, current account issues and fiscal deficit.
So at the margin, there is improvement. How do you express this in the market terms and how would the market behave when these data points solidify. It will not be the capital good stocks which will do well in a scenario like that, it will probably be banks. So that is the reason for the overweight position.
We also recognize that if growth remains slow then NPA cycle will remain alleviated compared to history. It might be improving because of the changes in power sector. For example the governments attempt to reduce the stress by raising electricity tariffs, by trying to improve coal availability etc.
So the NPA cycle might have peaked but it definitely has not completely come to an end. One needs to play this through a fix of private and public sector banks. More private sector leaning and adding to PSU banks at the margin because we think that some of the headwinds on NPAs might be easing.
They won't have come to an end. So that is the approach. Clearly we think that the macro stress easing is better expressed through a banking sector overweight position than through buying growth cyclicals like CV or capital goods.