Analysts continue to be bullish about Indian stock markets despite a slow start to 2014. Three weeks into the new year, the Sensex and Nifty are nearly unchanged from 2013 levels. Prabhat Awasthi, head (equity research) and managing director of Nomura, however, expects markets to rise 15-16 per cent from current levels over the next 12 months.Here's why Mr Awasthi is optimistic about Indian markets:
Edited excerpts:
What are the highlights of your 2014 outlook report?
We are more constructive on market than last year, despite the fact that we are not very bullish on growth prospects of the economy. We have been bearish on growth for a while and there is no change in our stance. However, we think that macro headwinds, which India was facing last year, are getting behind us and this relief will propel the markets upwards. There will be volatility around elections, but we are not taking a call this way or the other. Our approach on the sectors is very much the same. Exporters and a mix of interest rate cyclicals. But our stance on markets in terms of returns is more bullish than it was last year.
What does more 'positive than 2013' mean in index terms?
It's about 15-16 per cent returns from the current levels, so I consider the cost of equity or hurdle rate to be about 12-13 per cent. If we are doing better than that I would say that we are constructive. Last year, we were more worried about macro, but now current account deficit has corrected quite a lot, inflation is starting to stagnate and growth expectation from analysts have come down. Given the fact that growth expectations are in the price and macros will be better than expected, there will be re-rating of the market.
Will earnings surprise in financial year 2014-15?
No, they will not. The earnings expectations are still slightly higher, but the sales expectations are in line with economic reality. So you will not get the headwinds form massive earnings correction cycle in the market. The positivity will come from the macro side. Interest rates are too high, people are worried about monetary policy and when rates start to cool off, you will get tailwinds in the markets.
Is it going to be a hope based up-move?
Not really hope based. Hope based up-move is when you have no concrete news but an expectation of change in the environment. However what I mean is that we will get data that will substantiate that Indian macro is getting better. Data points on the macro points will keep getting better, inflation numbers won't be as bad as they have been looking, so that what will cause up-move. But there could be hope or despair based on when next government is formed.
Will core CPI come off in 2014?
A lot of inflation is driven form government policy. If you look at last 3-4 years, the kind of MSP (minimum support prices) increase and spending we saw by the government is the main reason for worsening of Indian macro. We saw a demand explosion which was manifested in inflation as well in current account deficit. Secondly, the food prices were going up because the government kept on increasing MSPs at a much higher pace. But now, there is no more room to do this. The government has run out of fiscal room. This year the MSPs have not been raised. Private investment has fallen off, so that is why you are seeing demand destruction. But now we are at the end of these problems. I am more optimistic on this front.
What will drive a pick-up in demand?
Growth is held back by policy issues, by the slow action of the government. Investment is only driven by the returns people generate and till the time policy paralysis, policy environment changes it's hard to see a growth pick up. So this is where politics come in. It's very hard to say which way election results will go. So this will be clear only after the election results.
What will be the impact of elections on the market?
We need the investment cycle to be back, especially the private investment. So this needs the government intervention in terms of availability of input. But which government will do it is hard to say at this point of time. However we don't need much of socialistic agenda, as a lot of it has already happened and there is no more room to do it. Even the current government has started to correct the fiscal deficit. They have started to raise diesel prices, are cutting fuel subsidy, are correcting fuel subsidy. A lot this needed with more firm hand in next government.
What is your sense on private capex?
In India was that there was a big promise in power sector, metal sector, telecom sector and road sector; but reality is that these returns have not fructified. People have figured out that while we have put up these projects, availability of fuel is a problem. Lot of issues cropped up later on. So, stability in the cycle along with a well-structured approval process will get the cycle going again. It's all about private sector getting confidence that there are returns to be had in a time bound fashion.
What are you top sectoral picks?
We are overweight on private banks for a while now. We are bullish on technology, pharma. Oil and gas is another one we like as we feel that next government will continue to raise diesel prices. We don't like consumer sector, because it being a defensive sector will face the brunt of maximum fiscal correction. We have been under weight on telecom for a while and that is not going to change
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