Broad economic recovery still some quarters away: Nomura

A strong BJP victory will be no doubt favourable for the market, but the upside may be limited by the fact that there has already been a rally in some sectors in the hopes of a desired outcome, says Prabhat Awasthi, Nomura Financial Advisory & Securities. A negative outcome may lead to a sell-off in equities.

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He does not think there is a structural trigger for growth to pick up till policy environment revives. "The investment cycle is a slow moving beast, it cannot be revised quickly," he told CNBC-TV18. He feels broader economic recovery is still some quarters away.
He believes for any meaningful pick-up in the market, banking sector performance will be key. He is neutral on the overall banking sector, with a positive bias towards private sector banks. Below is the verbatim transcript of Prabhat Awasthi's interview on CNBC-TV18 Q: The most obvious question on politics and what do you expect the market will take away from the two binary outcomes it is working with right now, one that the Bharatiya Janata Party (BJP) sweeps three of the four state elections we are talking about or two that the outcome is not that favourable for the party that the market seems to be favouring at this point?
A: I think a favourable outcome might give you some upside but depends on the extent of victory, the vote share that BJP gets. I think a strong victory will give some hope in the market. If you look at the stock prices, there has been a big rally in capital goods for example already. So some of those possibilities start getting priced into the stock because of recovery hopes. So I would say that while the market in a favourable outcome, might rally somewhat but that upside will be limited by the fact that there has been some rally in the market especially sectors, which are related to the economy already. In a bad outcome, obviously there could be a sell off especially in the stocks which have gone up in the hope that the election outcome will be favourable from market perspective. Q: What is your sense of what one should consider right now in terms of playing the  economic recovery, that chatter will begin to grow after the gross domestic product (GDP) numbers, are you guys sanguine that the GDP numbers are indicating that maybe earnings growth for the next four quarters need to be revised on the way up or is it too premature to start talking about all that?
A: I think the GDP number - 4.8 percent - is neither here nor there, it has obviously moved up from 4.4 to 4.8. Most of the prices come from rural agricultural growth. The broad industrial segment is still alluding us.
If you look at the numbers that are coming through - for example Tata Motors numbers came in for trucks today or yesterday and the numbers are quite bad compared to what people were expecting.
What you have on the positive side is exports and the rural side of the story because the crop will start coming and eating the market in terms of incomes in November-December period. So you might have a floor to the growth but I don’t think there is a structural trigger for growth to pick up till the time policy environment revives. The investment cycle I have talked many times is a very slow moving beast, it cannot be revised quickly. I am yet to see a big announcement from any of the large risk-takers in the economy, they are all in wait and watch mode. So I think you might sort of have bottomed out but still there is no trigger for a structural pick up.
Also remember that fiscal side is very challenged and we are running way ahead of fiscal deficit targets and if the government starts cutting expenditure like it did last year, there will be a growth pressure downwards as well. So that also is something that one has to keep in mind when thinking about recovery. But as I said, all in all I don’t think we have yet got a structural recovery theme in place because of the fact that investment cycle is very challenged. Q: You think this kind of rally which is playing out in the likes of Larsen and Toubro (L&T), Bharat Heavy Electricals Ltd (BHEL), Voltas, Crompton Greaves, JP Associates of the world there is more hope than anything else in it, the market is being too hopeful or wishful?
A: I think to some extent, it is because the late cyclicals rallying tells you that the market is definitely hoping that policy environment will improve. So it is betting on the election outcome as it has already. Having said that, I think one must remember that there are some positives which have happened in India which are to do with the fact that your current account deficit (CAD) issues are no longer thorny. There is a sense that the Indian currency has stabilised much better than the other Asian currencies, for example Indonesian Rupiah has been extremely weak but the Indian currency has been extremely strong with respect to Indonesian Rupiah. We were a much bigger currency earlier part of this year. So, the fact that Dr Rajan has got in through FCNR, a fair amount of money, CAD has become better. It is also playing a part in terms of valuation support. But the capital goods stocks have gone up, a large part of that move is still hope. Q: A lot of FIIs have been watching this entire electoral debate very carefully. For many people what is happening right now is kind of the semi-final before what we see in May next year. Assuming the worst that there is an outcome, the market is not happy with, would you say there is sharp downside risk for the market present in December and just by extension of that do you think people will choose to go in and buy into that weakness expecting a better outcome in 2014 or might that be a bit of a turning point for our markets?
A: Very difficult to speculate on as to if the results are bad, I think people will not buy into weakness first of all because these states, if you look at from all the surveys, it seems to portray as a done deal. So if that doesn’t turn out the way people or market expects them to be then I think there will be scare sell-off.
From the overall market perspective, I think it is hard to say that there will be a big sell off. You remember one thing that the defensives have increasingly formed a very large portion of the market so even though you have seen a very big rally recently in domestic cyclicals and capital goods stocks, the headline market has been held back because of the balancing factor of performance by defensives. So I think for the market to sort of completely sell-off, it will have to be near more expensive sectors.
So I think if the events don't pan out the way - we are expecting maybe 5-10 percent sell-off and if they do turn out the way market is expecting maybe 5-7 percent upside. That will be my overall market view because as you have seen if the election outcome is positive then your ITs, exporters etc will probably hold the market back, which is about 15-16 percent in the market. So a 5 percent rally means 10-15 percent rally in other parts of the market.