Prabhat Awasthi, Head of Equity Research & MD at Nomura Financial Advisory & Sec (India) says the fund house has cut its Sensex target to 17,000 for the year, citing risks such as the widening current account and fiscal deficits, as well as the uncertainty over policy matters.
He sees 5-10% downside to market from current levels. "India's relative positioning has gone down considerably over the last one year," he highlights.
While the dollar inflows from foreign institutional investors have not been robust because of apprehensions over the general anti-avoidance rule, exporters were seen holding on to their supplies.
Awasthi was negatively surprised by the trade deficit, which is what he says is weighing on the rupee.
The depreciation of the domestic currency comes at a time trade deficit has hit a record USD 185 billion in 2011-12, according to commerce ministry data.
"India's macro challenges have increased and market will find it very hard to move up because the growth and interest rate mix is getting worse," he told CNBC-TV18 in an interview.
Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos.
Q: You are turning more negative on the market. You have brought down your target for the year-end. You are turning more defensive in approach. What has led to this increased worry with which you now face the market? What is it that you think will be the prime course for this slip?
A: We don't have that much to look forward to in terms of what could happen on policy side. Importantly, we have been negatively surprised by the trade deficit numbers and the consequential impact it's having on the rupee, and liquidity. Therefore, it will definitely impinge on Reserve Bank of India's (RBI) ability to cut rates down any further. So, we think that India's macro challenges are going to increase. Short of big fiscal correction market will find it very hard to move up because growth and interest rate make it getting worse. That is not good for the market.
Q: What is it that you hear about inflow interest because the mood seems to have soured completely through the last series and the General Anti Avoidance Rules (GAAR) fiasco?
A: Flows have been lacklustre primarily because of the tax reasons. Till the time tax issues are sorted out, you are not going to see too much activity into the market.
The other issue essentially is that when we speak to global investors, there is a fair amount of disappointment with India primarily because of policy related issues, the overall macro situation, which are considerably worse compared to what the expectations were. So, in an event of global liquidity, India will also be beneficiary, but per se India's positioning has gone down considerably over last one year.
Q: In your note you do mention that you are underweight on the banking sector now. What are the primary concerns for the banking space? Would you attribute to both to private banks and to PSU banks, the underweight call?
A: There are two things that you must recognise earlier on this year. We were positive on banks. I think that is when there was some amount of bearishness overall in the banks. The bank stocks have been the best performers since then. We probably had very anti-consensus call from late last year to this time. Despite the concerns on banking stocks, we were positive and that has played out. So, one, valuations have moved up. They are not extraordinarily expensive. They are still a bit cheap. But they are not as cheap as they were when they started their run.
I think concerns are mostly macros. It’s nothing major to do with banking sector as it is. But we are essentially more concerned about the macro, the growth slowdown, the limited ability of RBI to cut interest rates and the fact that there are still pressures on NPAs, which will still remain till the time growth remains low and interest rates remain high. So, we don’t see triggers of banking stocks move up from here. In case of the policy remaining on the backfoot, you probably could see these stocks premium shrink a bit as you go forward.
Q: You have turned underweight on banks. Numbers on private sector banks have been quite solid this quarter. Is this is a call based on how little you expect the RBI to do from hereon or the threat of what happens on asset quality?
A: We as a house were less worried about asset quality to start with. That has not changed. But the fact is that asset quality concerns are there, they will remain going into next year. It will probably intensify a bit as you move forward into next quarters, especially because of the fact that number of projects in power sector will be under some stress there because of fuel issues.
Our problem is a macro call. It’s more on how little RBI will be able to do. Also, the fact that the overall external situation will tend to put pressures on liquidity, which essentially means that deposit might remain slow, which will essentially impinge on the ability of the banks to grow their books in an aggregate fashion. So, it’s more of a macro call worries on policy and external balances of the country.
Q: You have turned overweight on the metal sector. That’s not a call that we generally hear because of the kind of volatility that the global mother metals bring about to some of these stocks. What is your take on metals as a whole? What kind of opportunity that sector throws up?
A: There are two things. One, if you look at for e.g. even most metal prices, while they have fallen globally, actually in local currency they are more stable, in some cases they have risen on rupee terms. There is a lot of protection being afforded to Indian metal companies because of the rupee depreciation.
Second, these stocks have fallen a lot. So, the valuations have come off dramatically over last one year or so because of the fears have slowed down, global cycle issue etc. So, our view essentially, therefore, is that in a scenario when the local headwinds are stronger, globally facing sectors at least will do better, especially those which are shielded by the weakness in rupee will probably tend to do even better. So, metals are essentially being driven by a combination of valuations and the protection they are seeing because of rupee depreciation.
Q: How do you think this will play out? Will it be a month after month situation of the market grinding lower, weighed down by this macro and micro concerns or do you think there is a sharpish knock coming for the market that’s going to cleanse any valuation bubble we have in any particular space and then we will have to start from scratch?
A: There is no valuation bubble per se. So, certain crashes are only going to happen, if you have events either externally driven or there is an internal issue. Otherwise, it’s more of a slow grind because there is no major pressure from earnings. Corporate are generally doing all right. This is still an economy which is growing okay and corporate balance sheets are not bad. So, corporate earnings growth has slowed down, but it’s not going to decline more. So, there are no major triggers for the markets to fall dramatically. There are no valuation bubbles because the market is not very expensive. The question is that there are no triggers for the market to re-rate up; in fact, there are triggers for the market to slowly lose the multiples over a period of time.
Q: The final notification on the GAAR issue will come in on May 7. What stand you think the government will take? What do you think the market is watching out for in terms of texture of that note?
A: It is very tough to say what stand the government will take. But I think if you look at the macro situation, the fact is that the last two quarters we have done a BoP deficit. So, we are short of capital as a country, equity flows from overseas investors for a large part of investments that the country needs to run its day to day import to fill the current account gap.
It’s very hard for me to see that the government will continue to have a policy which will drive the investors away. Now, what they are trying to do is they are trying to plug the leakage through Mauritius route. So, I would think that there will be some resolution in the form in which they can get FIIs back on the table in the market. Now, whether they clear the Singapore route for FIIs and that becomes the new norm in investing, so they are more comfortable with jurisdictions which are more regulated. That could be one via media.
The other could be that you don’t get into business income and don’t tax the income as business income that could be another relief. But I think there has to be a comedown from a stand, which at this point of time looks fairly draconian. But the clarifications should be happy from investors’ perspective. From country’s perspective, it is absolutely needed, this money that the investors globally bring so. So, I think there will be some cool down of the fears that have gripped the market for last one-and-a-half month.