>Staying defensive despite a good budget (PRABHUDAS LILLADHER)

Against the global macro and market backdrop delineated below, our India equity strategy recommendations, both at the sector and recommended cash levels, remain unchanged for the forthcoming month, as shown in Table 1. In order to purely rebalance the portfolio in response to changes in weights due to market movement, we are adding 0.30% to FMCG, 0.20% to Technology and reducing 0.40% from Telecom and 0.1% from Real Estate.

Our recommended sector allocation has outperformed the BSE 500 by 0.36% since January 22, 2010. Our recommended stock portfolio has outperformed the Sensex by 9.38% since initiation on September 3, 2009.

We believe Indian market participants’ continued resilience in embracing the thesis of ‘full decoupling’ between the Indian and the Global macro outlook, at a time of burgeoning budget deficits globally and escalating credit concerns is most clearly reflected in the narrowing of valuation premium between small and large cap names (illustrated in Figure 1). Market cycle history has shown such valuation differentials to be justified only in macro environments characterized by low financial and overall macro volatility in addition to low liquidity premium. According to our global macro investment thesis, discussed at length in sections below, the current macro outlook does not meet such characteristics. As a result, we recommend clients to take a cautious stance towards smaller cap names and be overweight in higher quality large cap names.

Emerging Markets
In our view, the declines in risk assets since the beginning of the year are fuelled by a spike in risk premium triggered by (1) mounting sovereign credit concerns, more notably out of Greece, (2) a continued US dollar rally that has extended into the month of January and the earlier part of February, and (3) equities’ overbought condition with the turn of 2009 calendar year.

Our medium and long-term investment outlook towards emerging markets remains exceedingly constructive owing to emerging market countries’ strong balance sheets, underleveraged household sector, competitive currencies, and ample room for financial deepening dynamics to take hold. Moreover, the emerging markets’ growing share of world growth and world GDP, versus a mere 5 or 10 years ago comparison levels, has mitigated the macroeconomic contagion risks stemming from adverse economic growth and financial sector shocks emanating from the developed world.

To read the full report: EQUITY STRATEGY