Don't see major pre-election market moves: Nomura

Below is the verbatim transcript of Prabhat Awasthi's interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.

Sonia: In the last fortnight or so, it has become a bit difficult to pinpoint the direction that this market will take next because of the volatility that we have seen, both due to global and local factors. How would you approach the markets now?

A: So far as the very short-term view is concerned, there are two issues. There has been obviously some emerging markets (EM) selling which seems to be abating in any case. So we could see market heading up in the short-term but I would think that election will become the main theme going forward in the next three months. From what I understand investors are unwilling to take a major call on elections either way. Also given the fact that in the last two elections have led to extreme volatility in the markets either on upside or downside, I would guess that would be a major market move either ways probably is unlikely pre-election. But it could be that because you have seen some selling and that is abating in the EMs, so you could see some move upwards, a minor move but that will be stopped out by the fact that elections are around the corner.

Reema: You still maintain your December end 2014 Sensex target of 24,700, that would imply from current levels close to about 20 percent upside. What is it predicated on, A] in terms of an election outcome, is the base expectation that we are going to get a favourable outcome to the election which will enable this 20 percent possible rally? B] Also in terms of earnings expectations because Q3 was a very lackluster one. So what are you expecting in the coming three quarters by way of an earnings improvement?

A: We have not taken a call on elections. Our view essentially is based on two things. One is that we think that there will be - but I don’t think we are making a big call on earnings that earnings will grow 20 percent or thereabouts. We are essentially saying that earnings will grow at about 10-12 percent. So if we are calling from a 20 percent move in the market, it does build in some amount of multiple expansion. Our view is that, there will be some amount of macro easing in the overall macro environment in India. We have already seen current account deficit (CAD) coming off which has given a relief to rupee.

Secondly, we are seeing peaking inflation momentum in India. So at some point in time people will start to build in a better rate cycle. This will happen through the year. So between the two, earnings growth of 10-12 percent, which will be lower than where the consensus estimates are which are about 15-16 percent between the 10 percent and 12 percent earnings growth and a peaking inflation cycle you will get about 20 percent odd returns.

Sonia: How should investors hedge themselves against post election volatility because as we have seen both the times in the past on one occasion the Sensex was up about 15-20 percent and on the other it was down about 10-12 percent. So how should investors hedge themselves for that event taking place?

A: Hedging is for benchmark investors very easy. They just have to go neutral on the markets into the market rates for benchmark investors they can be neutral in India so that sort of hedging is easy. For investors who are absolute investors, they will have to buy Nifty Puts to hedge against the market volatility or they could be light on the market. I absolutely agree with you that there has been a lot of volatility also telling you that the markets’ ability to forecast election has been at best patchy if not downright poor given the fact that we had massive volatility.

One more thing which is important as to what the market behaviour before elections will be because for example if market rallies very hard against expectations in the next two months then it might - I would guess the possibility that the markets will go much further will probably be less. So the fact is that if you look at state elections, you saw a big market rally and even though the result surprise market positively somewhat, a lot of that was built in because opinion polls were predicting the same. So if the news becomes very favourable in next two months for a stable government then market price it much in advance.

Somehow I suspect that will probably be more rangebound, there will be less certainty on the overall absolute outcome. So it probably the best idea will be to neutral on the market in terms of sector weights as well as market allocation.