Sector churn to continue, mood positive: Nomura

Prabhat Awasthi, Nomura Financial Advisory & Sec feels that the sector rotation will continue but there will be further rally only if reform momentum is maintained.

In an interview to CNBC-TV18, he said, "We essentially have serious policy issues over last two-three years which have slowed down the growth. So if you see a turn in that that you can make a case that you could see a more positive sentiment going forward in the markets as well as performance."

According to Awasthi, several positives have already priced into PSU banks. Beside, he sees further upside in power sector non-bank financial companies (NBFCs). Betting high on India's reform initiatives, foreign investors have pumped in more than Rs 9,000 crore in the country's equity market so far this month.

FIIs investment in the country's equity market has reached to Rs 72,215 crore so far in 2012.

Also read: Nifty may not breach 5800 in Sept series, says Angel Broking

Below is the verbatim transcript of the interview

Q: Does this rally have more legs - 5,700 is being touted as some bit of a resistance but are there still decent gains to be made?

A: First of all, we are not as technical in terms of index breaching 5,700 etc. But I think the rally clearly has been led by two large events, one is that the first leg of the rally was when the QE happened even though that rally was very defensive in nature upto 18,500. Then, we have seen a milder rally but there is a lot of sector rotation which has happened within that small rally. The rally does not look strong in the headline sort of index terms but clearly there has been a very powerful move in some of the underlying stocks both on the upside and downside. This essentially is because of the policy environment change, which obviously was unexpected given the fact that there was fair amount of underweighting of India by global fund managers and fairly defensive stance by local fund managers.

The rally has been extremely strong in the last one week. We have seen stocks move to 30-40% so the question essentially is whether this continues or not. From our perspective, if the reform momentum continues then the rally might have legs. Unlike other global economies, which have seen much lower growth because of the deleveraging process, India does not have such issues. We essentially have serious policy issues over the last two-three years, which have slowed down the growth. If you see a turn in that, you could see a more positive sentiment going forward in the market as well as performance.

Q: Some of the fundamental traits of the Indian economy are still with us. Inflation is not coming down, there are still huge current account and a much bigger fiscal deficit issue which has not even been scratched. What have we taken away is Rs 10,000 crore, which could be replaced with a crude price hike, we are ultimately faced with political uncertainty, and therefore, any legislative reforms will be tough but ministrative reforms perhaps will be possible. Given that basic trait does not change, despite this shock of reforms which has taken everyone by surprise, does that put some caps or do you think that despite these, the market could surprise on the upside?

A: I think it does put some amount of cap clearly. Current account deficit issue has been building up since 2009 once the government expanded its balance sheet or P&L fiscal deficit expansion. You cannot wish it away very quickly. It will be a long drawn process. Clearly in terms of growth, for example, you cannot revive the investment cycle by just changing policy in a day because this would be the long drawn cycle; it will take time to slow down, it will take time to pick up. I think the slowdown story in India is still probably there. Therefore, you can argue that Sensex, which traded at about 15.5 odd times for five years in a much stronger growth environment, should trade at a discount.

The market today is about 14.5 times, which is not exactly cheap compared to where it has come from. If you look at the non-defensive index, which used to be at a premium to the overall market multiple, is not trading at 12.69. So, sector rotation would continue.

On your question on inflation etc, do not forget that globally, the environment of inflation is not as a big issue as it is in India. Part of the reasons for that at least this year is that we had a monsoon problem early part of this monsoon session. To some extent, those headwinds might be starting to abate.

The second thing is rupee depreciation. Rupee depreciation is partly a function of the fact that you have current account deficit and partly a function of that capital was just not willing to come into India given the fact that our policy environment was down in the dumps. If it continues to correct, you may be able to sort out the current account deficit problem for the time being.