New mkt highs unmerited; pare equity positions now: Nomura

There is absolutely no fundamental reason for the market to see new highs, says Prabhat Awasthi of Nomura Financial Advisory & Securities.

On the contrary, taking a bearish view, Awasthi says that investors should use the current rally to pare down their equity positions by booking profits. Most analysts, however, were bullish on the fact that the market could rally anywhere between 3 to 5 percent. Meanwhile, on specific stocks, Awasthi maintains caution on PSU banks and prefers private banks and has recently upgraded metal stocks. Also read: Continue to see extreme liquidity tightness: SBI head

Below is the edited transcript of Awasthi's interview to CNBC-TV18. Q: It has been some very strong tidings for the Indian equity markets, how are you positioned at this juncture? A: From our perspective, some measures which were taken when the rupee was very unstable might be rolled back but on the whole we are not expecting a rate cut, we are expecting some of the marginal measures to be eased. However, I think the rates probably will be on hold because at the end of the day there has been some pressure on inflation off late which essentially will be an issue for the RBI governor in terms of taking down the long-term rates. Q: When you say that you are expecting some minor tinkering do you expect that the marginal standing facility (MSF) rate could go down to 9.25 or 9.75 percent, what is your expectation in exact terms in all these? A: I don’t forecast it and we do expect MSF to be brought down. But I think if I am not wrong, it is 100 basis points (bps) but that basically is what we are expecting at this point of time. Q: But if it came less than that, is the market going to react violently? A: I don’t think that there will be a violent reaction. I think the main relief of the market has essentially been on account of the Fed and the main buying in the market has essentially come from global investors. In fact, local investors have been aggressive sellers. So, I think if Fed is the main reason and if it has gotten more benign then in the long-term, we can expect that there will be a breathing room for Indian monetary policy. So, what happens today, I don’t think will have that much of bearing. If the cut is more then obviously there is a support but I will not expect big negative reaction per se.

Q: Are you in the camp that believes that this market will see new highs towards the end of the year purely riding the liquidity wave? A: Fundamentally, I don’t think there is a major reason for the market to go to new highs because there are still a lot of headwinds. In terms of pure economic fundamentals and while one of the big overhangs (Fed tapering) has been reduced the fact is that if one looks at from where the market and the currency has gone since Bernanke spoke about tapering in May, the growth aggregate that we have been seeing are weaker and fiscal deficit situation seems to be tougher. So, the fact is if the market continues to rally, it will be very much against the fundamentals of the economy. But there is a lot of liquidity which is coming through. So the market going up another 5 percent maybe possible, but fundamentally, I don’t believe that it deserves to be here at this point in time or go up another 5-10 percent. The way we sort of trade this is that the market does go up then one should start paring down some of the positions because for the next 6 months, the data on earnings, the data on inflation etc, is not going to be exactly great.