Puneet Nanda, CIO of ICICI Prudential Life Insurance feels that there is an innate nervousness in the markets. Speaking to CNBC-TV18, Nanda said that he still expects a lot of volatility in the markets. All eyes would be on the budget now. Unless the FM announces an "investor-friendly" budget, the markets could remain volatile, he predicts.

Excerpts from CNBC-TV18’s exclusive interview with Puneet Nanda:

Q: Has the market stabilized yet or do you sense a lot of nervousness or potential of finding prices at even lower levels?

A: I would like to say that the market is stabilized, there is still a lot of innate nervousness, it's primarily because of the global factors, the news flow has been anything but positive. On top of that, the Indian macro story which was looking a extremely strong growth - the growth is still strong at 8.7% but there are eminent signs of slowdown. So putting everything together, I would say there is a lot of volatility still expected, all eyes are on the Budget. Unless the Finance Minster does bring out “an investor-friendly Budget”, I think the market will remain volatile for quite sometime.

Q: As DII, how would you approach the power space and what would you do with a reliance power post its listing?

A: I have said this in the past the power sector valuations are running high, people are banking on a lot of things but it is too much of a risk. So our stand on power is clearly underweight right now.

Q: Is there a risk of an P/E multiple compression in this market in 2008 because GDP is slowing down, interest rates have not started coming off yet, this earnings quarter wasn’t great. So given the environment, is it possible or likely that we see a little bit or derating after two years of continuous rerating of this market?

A: You can’t rule it out - the market has been on a rollout for about 3-4 years now. Earnings growth has been strong, now you are seeing some evidence of slowdown - not just at macro levels, even at the level of earnings growth. For example, this quarter earnings growth was about 18% versus about 25-30% last quarter. What has happened is that for the last three quarters, it's been the margins which have been improving, prior than the topline and this quarter even that has not happened.

So there could be a slowdown in corporate earnings, the rerating or derating happens, firstly because of the expectations versus what is happening. And secondly, in the context of other markets around the world, the fact is that versus expectations, there are perhaps a couple of sectors which did wellSo most of the others who are either in line or worst than that - on that ground, I do not see any rerating. Whether the derating will happen or not, I don’t know.

Compared to other global markets, we are definitely on the expensive side. Having said that, it’s not a doomsday scenario. The economy will still continue to grow 8-8.5% kind of a range, corporate earnings growth while it has slowed down from the highs that we have seen will continue to grow perhaps in the region of 15-20% in this kind of scenario, I don’t see any significant risk of sharp derating at all.

If one looks at it from the point of view of a global fund manger, the fact is that there is money to be invested and the money will have to be invested where the global fund manager thinks - he can either make most money or lose least. So the conservative guy will perhaps invest and lose more in bonds and we have seen that globally bond yields are coming down and the guy who wants tomake money will then look for relatively where there are better opportunities and in that landscape, India will still continue to stand out.

Q: Domestic money participation has been lower though this month, where is it that you are looking for opportunities or value buys now?

A: I don’t think the domestic flows has been low - for example in the month of January, the domestic flows were very strong. The fact is that the foreign outflows were significantly higher. So the domestic money tends to come in smaller packets and tends to be little bit more stable and hence you saw a big market correction. I think in terms of valuations, the two big sectors which makes more sense from investmentspoint of view are the real estate, financials and the capital goods engineering kinds of sectors.

Q: What do you think - we’ll go back and test the lows of two-weeks back or what kind of a trading range do you see in this leg of a consolidation for the Sensex?

A: The market going down further from here cannot be ruled out clearly. How much further it can go, it’s very difficult to hazard a guess ; it would be almost foolish to do so. It’s time for investors to do two things - one is the need to peer down the expectations; the returns that they can make from this market because investors especially in the last three-four years have been used to extraordinarily high returns. That expectation has to be peered down.

So once you are convinced about that, then it’s time to take fresh look at the market, take a call on your horizon, think about how much money you can invest for the long-term. If one starts taking that call and go back to the basics like asset allocation and investing for the long-term - given where the economy is, it’s still is a very attractive market to be in and then irrespective of whether the market goes to 5,000 or even 4,900, I don’t think it is going to matter that much.

Q: What’s your call been on real statesand have you at all looked at the current IPO that’s open from the realty space?

A: I think the realty space - the only positive from an immediate perspective is the possibility of interest rates coming down. Other than that if one looks at real estate on a demand-supply scenario, there is a supply overhang. Both in terms of real market as well as financial markets, there’s a bit of a investor fatigue that has crept into the market; even the number of real estate IPOs that have happened over the last one year. If one looks at the in terms of what’s happening on ground among the three broad sectors within real estate which is commercial or office space, retail and residential. Commercial is the only place where perhaps the demand supply scenario can still be in favour of the real estate market on both retail and on the residential space, I think the supply is inexcess of demand. So I would say real estate is definitely something that one can be underweight on as of now and if one definitely sees some signs of sharp interest rate moves downward that is the time to look at it.

Q: Is it a good time to buy IT after the tremendous fall that these stocks have seen?

A: IT is turning out to be a bit of a defensive play, purely from valuations perspective - it is indeed very attractive. The way the results have come, I would say they have been pretty much in-line, barring one or two companies that did very well and one or two companies not so well. The issue has been on the state of the rupee as well as on the macro environment of the US and how that would matter. I think time has come when even taking that into account, one can look at some IT stocks very selectively. But I think the time has come.

Q: From an equity market perspective because of the liquidity and global concerns right now how much do you expect the Budget to do even for the sentiment of trade?

A: It all depends on what really comes to me as Budget. As I mentioned earlier, the global scenario is not so great - there are a lot of weak news flows that are coming, data points are not that great even domestically in terms of results. Broadly, I would say in-line; not so positive surprises. So there are no positive triggers for the markets.Budget is perhaps the only thing that people are looking at. There is talk about some kind of cut in tax rates, given the extremely healthy tax collection - certainly it is going to have an impact. Whether it is going to sustain, depends on whole host of other factors that happened after the budget - both from a macro as well as from a corporate earnings perspective.

Q: What else can I do - everybody is talking about the Budget barring tinkering with the surcharge or maybe changing slabs for individual pairs which might on the margins help 2-2.5% on earnings or savings - what else can we do every year we hear about this big budget factor and it turns out to be complete damp squib with little or no impact with 48 hours after the event?

A: I think you are right. For the last few years, it turned out to be a pretty much a non-event. The fact is that the hands of the Government are also tight to a large extent, given that there is Fiscal Responsibility and Budget Management Act or the FRBM; they have promised to stick to it - the budget deficit cannot be too much different from what it is around 2-3%. I think what the market is going to look at it, is what is the vision that the government is going to project in terms of the direction on the policy. So tax is one thing, there can be several other things.

For example, if one talks to any foreigner who comes to country, first thing he says is that things are looking good, the mood is good but the infrastructure is pathetic. There has been lot of talk on the infrastructure side that we should do this, we should do that. But the fact is that they have not been anywhere close to the kind of investment that one needs in the infrastructure.The government can do two things - one is they can spur far more investment in infrastructure and they could also think of easing some kind of foreign flows, specifically into infrastructure. So I think it’s going to be the policy and in the direction that one is going to look, at rather than the specific steps that would happen.

Puneet Nanda's Disclaimer:It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.