Sensex @ 30K: Nomura on what retail investors should do now

When asked if it would be a good idea to take some profits off the table given the ferocity of the recent rally, he said that trying to time the market may not help in a structural upturn.

He particularly advised retail investors to continue with systematic investments and said that they should look for a 16-18 percent annualzed growth over five years.

Weighing on the private banks versus PSU banks debate, he said that while he would have a larger weight on private banks, it would now be time to start upping exposure to some PSU banks that have better asset quality.

Below is the transcript of the interview on CNBC-TV18.

Sonia: The market has so far given us gains of 10 percent this year already and it is not even three months into the year, do you get a sense that 2015 could be as good or perhaps even better than 2014 given the positives that we have had in the early part of the year?

A: I am not sure it whether will be bigger than the last year because the last year I think there were several large changes not only on the macro side but also on the government side. So the multiples moved up quite significantly last year as the market moved away from distrust towards the hope market.

Clearly, we are still seeing changes for example the rate cycle that you saw today, we are still seeing changes in growth expectations, which will come through as we go through the year so multiples can still expand but I don’t know -- I am not sure whether we will see as big a market in terms of the percentage terms that we saw last year. It will be good market but I am not sure it will be as good as last year.

Latha: How does this change your view of the index as well as expectations of monetary stimulus?

A: I think from a strategy perspective, we did expect that if you look at what you said in a strategy, in the beginning we said that there will be improvement in growth and rate cycle together. So it is sort of building that in somewhat in our targets, so at this point of time we are not inclined to change the target of 33,500 which we put at the beginning of the year. At that point of time it was still a good 22 percent upside so we have seen some of that come through but at this point of time I am not looking at changing that target as we expected some of this to happen.

Sonia: What should the strategy be for a retail investor who has been investing in this market through the SIP route, should you now at this point in time increase your allocation or does it make more sense to perhaps take some money out of the table given that the run has been so fierce?

A: That is a very tactical sort of view and the fact is that if the market is in a long-term structural uptrend then doing tactical pullouts of the market might not always be very successful. For example, today this rate cut was fully unexpected, so if you were out of the market this point of time, you would have lost out.

So I think from retail investor perspective, they should take a three-four year view, continue to invest in a systematic fashion and not look at very short-term move. The market could go down to 3-4 percent but if you are on a structural uptrend and you are hoping for about 15-18 percent return on a compounded basis over five years then I think it makes more sense at this point of time to trying to time the market.

Latha: What is [Nomura economist] Sonal Varma telling you, does the copy look like a little laboured that the governor has given the rate cut little reluctantly or does she interpret it as saying that since it is unscheduled twice in a row, one should expect more from the Reserve Bank of India (RBI) now?

A: I didn’t have a chance to speak with her but what I have read from this statement cearly is there is some mention of the Budget in the statement. They have clearly said that the transfer of money to states will consolidate their finances, so the RBI has taken a favourable view of the Budget and on top of that obviously they are concerned about growth. So I think we will have to basically look at how we recalibrate our expectation on rate cycle but clearly, this is a positive surprise and that will have to be built into the expectations for future.

Anuj: Does this now become a complete bottom-up market, yesterday we saw some of the rank underperformers doing quite well, some of the stocks which are trading with lower valuations doing well, do you get a sense that the low hanging fruit in terms of sectoral play might have been done and from nowon it will be about individual stocks and maybe some of the underperforming ones?

A: The micro market is when the overall multiples are not changing and the market is being driven by earnings changes. Market has not been a micro market in the last one and a half years, it has been more of a macro markets, where changes in valuations are the key drivers of stock prices rather than earnings. I think we probably have a mix of both this year. Primarily because as I said if the rate cycle is moving down then it will definitely yield a higher multiple for the market and that is what I call a macro market and not micro market because changes evaluations overall for the market and sectorally it also causes relative performance distortions.

I think we still have a play of rising growth and some rate reductions over a period of time. Therefore I think at least this year I expect the marcos will still continue to play a strong role maybe next year sometime we will probably revert back to an earnings led growth story when the growth picks up and when you stabilise on rates and growth expectations. So we probably still have six-eight months before the market becomes more earnings driven and bottom-up driven than top-down.

Sonia: What are your thoughts on the public sector undertaking (PSU) banking space versus private banking as well? We were speaking with the banker who said it is a matter of time before the deposit rates fall further, would you increase your allocation to PSU banks because they were the best performers of last year, one of the best performers?

A: We have been doing that, we have been increasing our weight on PSU banks, last few months have been especially last three-four months have been a bit of disappointment primarily because of the non-performing assets (NPA) numbers. So I think if I look at the PSU bank space, I don’t see more homogenous, there are weaker PSU banks, there are stronger PSU banks.

We at this point of time believe that given the fact that the available growth within the banking space is limited, you probably still have to bet on the stronger PSU banks. You have to have a larger weight still on private banks because they will continue to gain market share but the PSU bank space has to be limited more to the stronger banks, which have lesser restructured assets and have comparably better asset quality.