India in sweet spot; see 12-13% mkt return in 1 yr: CLSA

India is in a sweet spot when compared with other emerging markets considering its macros are improving, says Mahesh Nandurkar of CLSA. But, there is a sense of disappointment in terms of corporate earnings, he says. However, the silver lining at the moment is that domestic investors are willing to take a long-term view on India, he adds.

According to Nandurkar, investors did not factor in impact of disinflation on earnings estimate. The property market is also going through slowdown due to disinflation. Nominal inflation is down to 8 percent from 14 percent. He in fact does not expect supernormal equity returns over the next 12 months. He sees the market giving 30 percent returns in the next two years and 12-13 percent return in one year.

He is overweight on IT sector as recovery in the US market is expected. He also expects financials like banks and NBFCs to do well over the next two years. He believes capital goods, cement and property will lead market returns.

Below are the excerpts of the interview..Sonia: I wanted to know what the response is so far to the conference and how is the mood towards India now?A: The response from the investors continue to be quite positive especially because India clearly stands out relative to the other emerging markets in terms of various macro parameters such as the current account deficit is now down significantly and now it is less than the Foreign Direct Investment (FDI). The fiscal deficit is not an issue any more and while there are several other global economies which are struggling to revive inflation India seems to be situated in a very sweet spot at around 5 percent kind of an inflation.So, while there is some sense of disappointment as far as corporate earnings go and there is an investor concern that while all the macro parameters look quite alright why isn't that translating into a better corporate performance as yet but I still get a feeling that investors are willing to take a more longer term bet and are willing to wait for the corporate earnings recovery to happen.Anuj: CLSA was among the most bullish in terms of the whole Modi premium on India till about one and half year back. That optimism was a bit misplaced given the way we have seen the kind of market reaction, the kind of earnings that we have seen over the last 12 months or so, would you say that in hindsight maybe that optimism was misplaced or would you still continue with that optimism?A: As far as the government actions are concerned the actions are still aimed at improving the trend going forward. We are clearly seeing several incremental positive steps from the government side. Probably one of the reasons why the markets and the investors overestimated the pace of earnings recovery was that while the macro was running good the market underestimated the impact of disinflation. While disinflation is something that all of us like especially coming down from 10 percent Consumer Price Index (CPI) down to four to five percent level but somewhere the market misread the impact the negative impact that disinflationary environment has on growth. And that has manifested itself into weaker rural wage growth, weaker rural demand growth. I believe that the investors and the market to some extent still haven't fully appreciated the fact that the property markets are also going through a phase of slowdown which can be partially attributable to the low inflation once again. Also the nominal inflation growth rate which was at 14 percent two years ago now is down to about 8-9 percent. So, while the real Gross Domestic Product (GDP) growth rate remains unchanged the nominal numbers have come down and we as analysts and investors focus on corporate performance on nominal terms and not on real terms. So, all these factors put together I would say that the reason why a good macro is not translating into a better micro or corporate performance is the disinflationary environment where the market underestimated the impact of.Sonia: But what do you see as returns from this market over the next one year because this year the market has done nothing. In fact it is down 5.5 percent. From this level of 25800 on the Sensex what kind of realistic returns would you expect over the next 12 months?A: Over the next 12 months I wouldn't expect a super normal return, I would expect returns in line with cost of equity which would be about 12-13 percent. But the year after that could be much better because by that time we would be witnessing the full fledged capital expenditure (Capex) recovery and to that extent the corporate earnings would also be much faster than what it is now or what it will be over the next 12 months or so. So, my sense is that it is reasonable to expect over the next two years about 30 percent market return but over the next one year I would say maybe 12-13 percent.Anuj: One of your top picks is Infosys. Are you surprised by the way that stock has started to underperform so much over the last few days?A: I will not be able to comment on specific stocks but yes, we continue to like IT sector in general and that remains one of our top overweight sector and the reason behind that is clearly we are expecting some sort of recovery from US and that should be a positive news for the discretionary expenditure and therefore the IT services sector in general and also the fact that stronger dollar will help the reported numbers in rupee terms as well.Anuj: What about the pharma sector because till about three months back nothing could go wrong there. Now all of a sudden we are seeing big cracks opening up in some of the large names. What is your call there?A: Yes, you are right and we have seen heightened element of regulatory risks in various pharma sector names and clearly that is more attributable to the adverse commentary coming in from the US Food and Drug Administration (FDA). So, I believe that this factor has driven the beta for the sector. So, to that extent the sector has gotten de-rated. But I still believe there are some good quality names, good quality management in that sector and the recent correction or recent underperformance in some of these names I believe is a good time to accumulate.