>India Equity Strategy (CITI)

Spring is in the Air, but Hot Summer is Ahead

■ Spring is in the air – India’s strong 25%+ bounce from lows, +ve YTD performance, and recent peer market outperformance has been backed by: a) Near-trough valuations, b) Signs of growth revival and resilience in consumption demand, c) Rising monetary flexibility and rate reductions, d) Liquidity and stabilization of domestic credit market, e) Little inventory build up, and f) Currency support, with possibilities of a current account surplus ahead. All this still holds.

■ But hot election and economic summer is ahead – India’s 2009 spring will change to election season; if it weathers this unscathed, then we see a hot economic summer ahead. The global risk pullback, election buildup and fiscal stimuli would have more lingering impact: a) 10%+ fiscal deficit, b) Peak system leverage, c) Steepening yield curve, d) Weakened investment and corporate confidence cycle, and e) Earnings de-growth. We believe these will not change as quickly or predictably as seasons and are a medium-term cap on economic and market rebounds.

■ India – economy and markets – more crawl than spike? – India’s bear markets have historically lasted 30 months on average, been longer than regional markets (21-23 months), and longer than India’s bull markets (bar the last). Is this bounce the beginning of a bull run? We think not, given India’s equity market lows are shallower, longer, and more in sync with its economic cycle. The market is more likely to crawl rather than spike out of its current trading band.

■ Limited upsides from here, but let's not be too defensive – We expect the market to maintain a 9000-10500 (11x-12.5x) trading range and expect interest rate and rupee gains. We would overweight Banks, Telecom, and Pharma and underweight IT, Capital Goods and Cement.

To see full report: INDIA EQUITY STRATEGY