Stock Market

Nomura sees monsoon as biggest risk to market rally, but sees 10-11% rally in 2017

Indian market scaled news highs in this week but the rally may not be over yet which investors have already started to talk about. Nomura India which remains constructive on India market thinks that the rally could extend by another 10-11 percent by 2017 end.

“Our view fundamentally for the India market was around 20 percent return but after the rally, it looks like we could do another 10-11 percent return until the end of the year helped by liquidity,” Prabhat Awasthi, Head of Equity & MD, India, Nomura said in an interview with CNBC-TV 18.

“We are constructive on the India story and the country continues to stand out as a market with growth profile among other emerging markets. But, valuations have become pricey; it has not deviated much from long-term averages of the last 5 years,” he said.

The valuations look frothy compared to what they were 3 months ago, but on a macro basis valuations still looks okay, he added. The Indian market is trading at 16.8x compared to 17.1x which is a 5-year average of market multiple on a 12 months forward basis.

Nomura is overweight on the consumption space and the tilt is more towards autos.

Talking about the biggest risks that market faces right now is a monsoon. Most experts are counting on earnings recovery as well as economic recovery and monsoon play a very important role in that.

A bad monsoon could well turn tricky for India Inc. and analyst estimates. Rainfall was normal in the year 2016 after two successive years of the deficit that curbed output of sugar cane, wheat and pulses.

“The risks to Indian story are more global. Talking about local risks, a bad monsoon could well translate into higher inflation and all the good macros we are seeing might get strained a bit,” said Awasthi.

Other risks which India market might have to deal with is a slowdown in China, trade tension ballooning up due to Trumponomics as well as any sharp rally in crude oil prices.

Stock Selection 

The key to stock selection, as the es benefit described by Nomura, is to stick to the macro theme. The global investment bank focusses on those stocks which are expected to benefit from the expansion in the economy.

The top stocks in Nomura’s portfolio such as Maruti Suzuki, HCL Technologies, or even HDFC are trading either close to record highs or near 52-week highs. But, the global investment bank does not plan to rejig the portfolio, yet.

 

“Thankfully, they are out top picks are trading at all-time highs. Our strategy worked. The key strategy to our stock election is sticking to the macro theme and then we drill down to stocks based on that theme,” said Awasthi.

 

“We are changing anything. The growth dynamics in the economy is such that some of the names that we have chosen will be the biggest beneficiary of that growth,” he added.

 

Talking about banking space, Awasthi is the view that consumer-oriented bank are likely to hog the limelight when compared to corporate banks, because the corporate credit will take some time to pick up.

 

“The corporate credit will take slightly more time to pick up even if the growth in the economy picks up. The first phase in credit pick up will come from consumer’s side because deleveraging in corporate India will continue,” he added.