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Jun 26, 2012, 07.14 PM IST
In a series of downgrades, here is another one. Nomura has cut FY13 GDP forecast to 5.8% from around 6%. Prabhat Awasthi, Nomura Financial Advisory & Securities expresses concerns that despite fall in commodity prices, there is still need of capital for growth which is getting harder to come by as the external environment deteriorates.
Explaining the rationale behind the bearish outlook, Awasthi says that the support to GDP growth from either investment or consumption cycle has been weakening driven by policy inaction, global environment and partly because of the high inflation.
He also points out that market multiples is likely to be dependent on earnings growth. "The coming earning season could be fairly volatile because of the recent turmoil in global growth," he said in an interview to CNBC-TV18.
Awasthi also warns that the market may correct further if EU situation deteriorates.
Meanwhile, Awasthi is expecting fixed income markets to rally more than equities and rupee to appreciate from current levels.
Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: You guys have downgraded your expectations after a relatively positive outlook earlier in the year. What led to that downgrade?
A: We downgraded the market in March and then again re-graded it in April. Most of that essentially was led by our expectation that the external sector was looking increasingly paralysed and even currency had deteriorated significantly. That was the first phase in which we got concerned about the currency and its concomitance impact on the economy, inflation and growth.
We have always been concerned about policy action and the external environment, which has clearly deteriorated, which is not very good for India. Despite the fact that we have seen fall in commodity prices, we still need capital for growth. That is getting harder to come by as the external environment deteriorates. So, on an incremental basis, clearly pressures have only got larger. So, I think the first reason to downgrade the market in March was the external account.
I must mention that by that time India had really outperformed the regional markets extremely well. So, partly the valuations were not as favorable as they were in the beginning. Even now I think they have not gone back to the levels that we saw in the beginning. So, to that extent, there was a lack of valuation support also at higher levels.
Q: Is it your call that over the course of the next few months valuations for the market are going to contract significantly?
A: I think that’s a very tough call. Clearly, growth has been disappointing as we have gone along. So, growth expectation of the market moved down from 9 to 8%, 7% and now 6%. This morning our economists have downgraded the FY13 GDP forecast to 5.8% from a much higher number. So, clearly from around 6%, you are seeing continuous downgrades of the GDP forecast.
The support to GDP growth from either the investment cycle or the consumption cycle has been weakening partly because of the policy, partly because of the global environment, partly because of the high inflation etc. So, now in that situation what multiples should market trade at becomes challenging because of the fact that we are already trading at a discount of 20% odd to the long range multiples, even probably lower than that.
Q: Is 5.8% GDP growth for India that you have flagged off today, plus increasingly weakening global growth environment is baked into Indian stocks today or should they adjust to a lower platform?
A: I think it depends on several things. One, the multiples are also subject to the earnings that come through. I suspect the recent weakness in economic growth globally as well as the data, which sorts of seems to be weakening in pockets even in the domestic economy, might mean that the earnings themselves might not come as robust as expected.
If you look at the consensus forecast of earnings, they still continue to correct down. Despite the fact that the market has corrected, the multiples don’t seem to be correcting primarily because every month we are seeing earnings cuts. So, I think the coming earning season in fact could be fairly volatile because of the recent turmoil in global growth. I think that will essentially be very defensive factor. So, I don’t think it is fully baked in. Going into the earning season, you might have some challenges on the market.
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