Stick to Sensex target of 29,000 by Dec end: BNP Paribas

Markets have had a phenomenal rally over the past about two months -- thanks to a realization that macros are not as bad as they were being imagined earlier, as also a change in global central bank monetary policy stance, says Manishi Raychaudhuri of BNP Paribas.Speaking to CNBC-TV18, Raychaudhuri said he was sticking to his 29,000 yearend target for the Sensex, even as he said valuations are looking a bit stretched in the near term.He believes Indian valuations will look attractive if market falls 6-7 percent and says he is positive on private sector banks, especially retail lenders. However, he is of the view that the bad loans pain may continue for a few more quarters for public sector banks.Other sectors Raychaudhuri is bullish on includes IT services, building material and cement sector. Below is the verbatim transcript of Manishi Raychaudhuri's interview with Reema Tendulkar & Mangalam Maloo on CNBC-TV18.Reema: It has been a stellar rally for our market, all the way down from levels of 6,800 that we hit on Budget day and now to near 8,000 and even technically if we see; it has been close to about 50 percent retracement from our highs of 9,100 to 6,800. What happens to the market from here on?A: To trace the reason why we have had a sharp rally. One has to look at both the global and the local factors. First of all, that massive downturn in the markets particularly emerging markets that we saw in January and February, they were possibly too much too soon and the real situation on the ground wasn't all that bad.Second, around the same time, around mid-February, we saw stance change on the part of the global central banks particularly the developed markets central banks led by the Fed, which clearly indicated a looser-for-longer kind of stance for monetary policy. That in turn lead to stabilisation of the US dollar and that was a departure from the appreciating trend that we had seen over the past couple of years, which in-turn lead to revival of flows into emerging markets and naturally India also benefited from that.Going forward, we think that this lifeblood equities, which flows into emerging markets are likely to continue for some more time and India has not benefited from this life blood to the extent that it could have because out of those USD 12 billion odd that flew into Asia, India got only about USD 2.6 billion. The bigger recipients were Taiwan and Korea. India typically gets about 25-30 percent of flows into Asia ex-Japan and there is no reason why it shouldn't go back to that average. So when we combine these factors, it seems that over the medium-term the rally may continue for longer. The only concern that I have is over the very near term because valuations particularly in relation to emerging markets or Asia ex-Japan are beginning to look slightly on the higher side. It is about one standard deviation higher than the long-term average. So in the very near-term the market may take a breather here but over the medium to longer term our bullishness stays intact, in fact I had commented on your channel that we have a target of 29,000 on the Sensex by the end of 2016 and there is no reason to change that target now.Mangalam: You did indicate that from valuation perspective we do look a bit expensive, so once we do see a bit of a reverse outflows from these EMs or some profit taking, at what level do you think the valuations will start to look attractive again and at what levels on the Nifty as well as the Sensex will you see incremental funds coming into India?A: To lay an exact finger on this is very difficult but to give you some numbers, the average price to earnings premium that India has traded at compared to Asia ex-Japan is about 30 percent. In comparison to that the current premium is close to 42-43 percent. So I would think that if the market on a relative basis declines about 6-7 percent from here then the valuations would begin to look attractive again and I would stress on the fact that it can be relative and not absolute meaning that if India stays here while rest of Asia ex-Japan moves up in relation to India then also that same outcome would be achieved. So instead of looking at an absolute correction we may also see a time correction from the present point in time.Mangalam: So in that case, can one infer that we are going to be in this narrow range for a bit until the valuation start to look attractive and even if they don’t, there is no incremental positives for the market, is that your comment?A: The very near-term possibly, purely because the market has moved up so sharply but again I would stress the fact that when it comes to macroeconomic parameters and even the corporate specific fundamentals, then the Indian market possibly stands out as being in a goldilocks scenario and that is the name that economists have for it, which essentially combines an improving economic growth cycle along with a declining interest rate. That is a rare combination to find in most other emerging markets and that is why over the medium-term to longer-term we have remained positive on India. The very short-term maybe a different story.Reema: 29,000 on the Sensex still implies a 10-12 percent upside from current levels till year-end. Which stocks or sectors would you bet on which are likely to outperform?A: I won\\'t name specific stocks but there are three-four baskets as far as sectors are concerned. We still remain positive on the private sector banks particularly those concentrating on retail lending.The second bucket would be the IT services companies particularly the top run companies, which are clearly turning out to be more successful in getting their orders from the developed market companies.Third within the cyclicals, we think that the building material or the cement sector is beginning to look much better than it used to be.Finally I think some very select utilities, which have visibility about their project commissioning going forward particularly in the power transmission and distribution sector would also fit the bill.So these are the core four buckets that we are concentrating on.Having said that, there are few odd companies in the consumer staples like in tobacco space or some of the large industrial companies, which have their footprints in all areas of infrastructure, those could also be some specific picks on India.The best part about India is that out of 30-40 top run stocks, there are enough good growth opportunities and good management quality companies, which investors can focus on.Mangalam: You did speak about cement stocks, they have seen a goodish bit of a run up. Do you think valuation perspective wise they are still attractive and secondly what is your call on the commodities stocks because we have seen massive run ups in the metal stocks as well as public sector banks, any calls on all these three sectors?A: Generally commodities or the deep cyclical we are still not very bullish on because the oversupply of situation in most of the global commodities still remains.On the public sector banks, even though significant degree of bad loan problem has been recognised, we think that it may persist for another one-two quarters, which is not a bad thing over the longer-term but we would like to get some more visibility about the suspect asset quality problems of the public sector banks without before turning more constructive on them.