SENSEX NIFTY
Jun 04, 2012, 01.59 PM IST | Source: CNBC-TV18

Why does Nomura say fundamentals positive for India now?

The brokerage feels that this may be a turnaround time for India as Prabhat Awasthi, Nomura Financial Advisory & Sec said in an interview to CNBC-TV18 that fundamental factors which have been against India might start to turn more positive with the foreign commodity prices.

Prabhat Awasthi, Nomura Financial Advisory & Sec

Though Indian market is in a very bad shape, Nomura had raised the red flag in March itself. However, the brokerage feels that this may be a turnaround time for India.

In an interview to CNBC-TV18, Prabhat Awasthi, Nomura Financial Advisory & Sec said that fundamental factors which have been against India might start to turn more positive with the foreign commodity prices.

He explains that investors have already been underweight on India for a while now and hence do not see India-specific selling by foreign institutional investors (FIIs).

Overseas investors, for the second straight month, in May pulled out funds of Rs 347 crore from the equity markets. FIIs made gross purchase of equities worth Rs 42,443.30 crore and sold shares valued at Rs 42,790.70 crore, translating into a net outflow of Rs 347.40 crore, according to the data available with the market regulator Sebi.

"The global uncertainty of the kind that has happened was really not factored in into our numbers but fundamentally our view is that market should end the year with 12 months forward. Our view was 17000 which if you look in current context is about 7-8% upside. Now for equity investors you at least need about 13-14%. If the risk aversion is higher than you probably need more. So, I would hold on to this target but I would say that we have to watch the global macros so you can get a market much cheaper than what it is today," he elaborates.

Below is the edited transcript of Awasthi’s interview with CNBC-TV18. Also watch the accompanying videos.

Q: Can’t imagine that the mood is very positive though considering what’s been happening through the last few days. What is your expectation of what markets are going through in the near term and whether or not this is headed for that big cataclysmic kind of fall?

A: Tough to say, but things have turned down quite a bit because of the European situations. So, the mood is very somber. In the event that European crisis intensifies then India will not be standing on the sidelines. In the longer term there might be positives emerging out of this because obviously oil prices have fallen, commodity prices have fallen - that’s positive for the current account in the long term. It is positive for our inflation the long term and gives policy headroom both on fiscal side and monetary side.

But in the very short term this fall in commodities is causing collateral damage in capital flows. We still are a current account deficit country so we cannot take what is reflecting in the currency. Very tough to predict if the risk intensifies where the markets will go. But I would say that markets are cheap but not extremely cheap so they can well fall. It will be very tough to call a fundamental bottom to this. So I would say that you have to stand on the sideline, let the risk subside and then make a call.

Q: What kind of level do you hope to see the Sensex at by the time the year ends and how would you tactically approach the market?

A: We have a published view which when we first downgraded in March and then we got even more bearish in April, so we downgraded the Sensex target of 17000. Most of it was lead by our views on currency and the current account. The global uncertainty of the kind that has happened was really not factored in into our numbers.

Fundamentally, our view is that market should end the year with 12 months forward our view was 17000 which if you look in current context is about 7-8% upside. Now for equity investors you need about 13-14%. If the risk aversion is higher than you need more. I would hold on to this target, but I would say that we have to watch the global macros so you can get a market much cheaper than what it is today.

Q: One point that people have been making about the month gone by is that the market lost quite a bit of ground but it didn’t do it on significant outflows. What's the sense that you get from amongst your gathering at the conference in terms of whether that is going to be the bigger problem this month? Will it be accelerated or accentuated by sharp outflows?

A: There are a couple of things. When we talk to global investors it is very clear that in general global investors which are non-dedicated have been absent from India or have been hugely underweight. From the perspective of a generalised only India based selling people have already been underweight. I hear more often than before that lot of negatives here, but they are known and that most of the big investors are underweight.

To that extent may be that’s why you are not seeing that much selling because people have already been underweight India for a while now. The fact is that the inflows and outflows are not a function of people raising cash, but either taking a relative view of the market or seeing generalised pullback in their AUMs.

As far as former is concerned, people are already underweight. As far as the later is concerned if the risk intensifies then we can see more selling. I won't say that this is the end of it. If there are emerging markets (EMs) generally outflows in EMs then India will be a part of it. But specifically related to India may be there will not be too much from here because the fundamental factors, which have been against India might start to turn more positive with the foreign commodity prices.

Q: In your past experience how have you dealt with a situation like this where both - consumption and the investment cycle has slowed down and what kind of supply side reforms do you think the market is hoping to watch out for?

A: Given our current account deficit which was sort of getting unmanageable, there had to be a correction in demand. The demand comes from two sources - consumption and investment. Typically an investment slowdown will ultimately lead to consumption slowdown because you are putting up the supply and you are hiring lesser labour. At some point of time consumption starts to get affected as investment slows down.

In India’s case, the unfortunate part has been that the investment slowdown has been led by policy issues in the large sectors of economy like power, telecom, etc. So the fact is that investment slowed down much earlier and given the fiscal policy - consumption continues to remain buoyant. Fiscal room is very little now and the fact is that given that the investment cycle has already slowed down, consumption was a foregone conclusion.

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