Nomura cuts Sensex target to 17K; lists FY13 performers
Prabhat Awasthi, Head of Equity Research & MD at Nomura Financial Advisory & Sec (India) says the fund house has cut its Sensex target to 17,000 for the year, citing risks such as the widening current account and fiscal deficits, as well as the uncertainty over policy matters.
He sees 5-10% downside to market from current levels. "India's relative positioning has gone down considerably over the last one year," he highlights.
While the dollar inflows from foreign institutional investors have not been robust because of apprehensions over the general anti-avoidance rule, exporters were seen holding on to their supplies.
Awasthi was negatively surprised by the trade deficit, which is what he says is weighing on the rupee.
The depreciation of the domestic currency comes at a time trade deficit has hit a record USD 185 billion in 2011-12, according to commerce ministry data.
"India's macro challenges have increased and market will find it very hard to move up because the growth and interest rate mix is getting worse," he told CNBC-TV18 in an interview.
Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos.
Q: You are turning more negative on the market. You have brought down your target for the year-end. You are turning more defensive in approach. What has led to this increased worry with which you now face the market? What is it that you think will be the prime course for this slip?
A: We don't have that much to look forward to in terms of what could happen on policy side. Importantly, we have been negatively surprised by the trade deficit numbers and the consequential impact it's having on the rupee, and liquidity. Therefore, it will definitely impinge on Reserve Bank of India's (RBI) ability to cut rates down any further. So, we think that India's macro challenges are going to increase. Short of big fiscal correction market will find it very hard to move up because growth and interest rate make it getting worse. That is not good for the market.
Q: What is it that you hear about inflow interest because the mood seems to have soured completely through the last series and the General Anti Avoidance Rules (GAAR) fiasco?
A: Flows have been lacklustre primarily because of the tax reasons. Till the time tax issues are sorted out, you are not going to see too much activity into the market.
The other issue essentially is that when we speak to global investors, there is a fair amount of disappointment with India primarily because of policy related issues, the overall macro situation, which are considerably worse compared to what the expectations were. So, in an event of global liquidity, India will also be beneficiary, but per se India's positioning has gone down considerably over last one year.
Q: In your note you do mention that you are underweight on the banking sector now. What are the primary concerns for the banking space? Would you attribute to both to private banks and to PSU banks, the underweight call?
A: There are two things that you must recognise earlier on this year. We were positive on banks. I think that is when there was some amount of bearishness overall in the banks. The bank stocks have been the best performers since then. We probably had very anti-consensus call from late last year to this time. Despite the concerns on banking stocks, we were positive and that has played out. So, one, valuations have moved up. They are not extraordinarily expensive. They are still a bit cheap. But they are not as cheap as they were when they started their run.
I think concerns are mostly macros. It’s nothing major to do with banking sector as it is. But we are essentially more concerned about the macro, the growth slowdown, the limited ability of RBI to cut interest rates and the fact that there are still pressures on NPAs, which will still remain till the time growth remains low and interest rates remain high. So, we don’t see triggers of banking stocks move up from here. In case of the policy remaining on the backfoot, you probably could see these stocks premium shrink a bit as you go forward.