Strategy For Indian Equity & Derivative Market

India Weighting Raised In Asia Portfolio

Event
Our regional strategy team has adjusted its portfolio to reflect the latest pricing and evolving risks. This adjustment has seen India being raised to Overweight (refer to our report Rocks on Stocks: Cheaper but not cheap enough,23 January 2008)

Impact
India raised to Overweight. We had been underweight India on valuation concerns but we now have less to be worried about. India’s two key positives are that its economy is likely to prove relatively resilient to the widely expected slowdown in global growth and the market has delivered very strong and stable earnings growth in recent years. Given that we appear to be entering a period of slowing growth and earnings disappointments, this is precisely the
kind of environment in which India deserves a premium.Indian economy – growth at little risk. We forecast India’s GDP growth will slip to 8.5% in 1Q09 from 9%+ in the June-September quarter and pick up to 9% thereafter. We think this forecast has little risk given the relative insularity of India’s economy. The worst-case scenario would see this recovery getting
pushed back by a couple of quarters – we do not expect this to be a serious risk to earnings. We therefore maintain our top picks: HDFC, Reliance Communications, Reliance Industries, DLF and Tata Steel .
Defensive strategies against a US recession. The obvious play would be to go for stocks with minimal probability of earnings downgrades on a US recession. India has many such stocks, where the key earnings drivers are related to the domestic economy. Telecoms, infrastructure and consumer are the key sectors here and our top defensive picks would be Reliance Communications, Grasim, Larsen and Toubro, ITC Ltd, HDFC and Bajaj Auto.

Outlook
We think that the underlying story remains strong and the current period of
correction remains an ideal opportunity to enter for the long term. There is far
too much noise in the market for us to hazard a view on the immediate term –
this may not be the bottom or the worst that the market has seen in the short
term. However, we strongly believe that the correction provides an opportunity
from a one-year perspective.