>Strategy: Lengthening Shadow

Global Economy: On thin ice

• EU economies would see recessionary conditions persisting although ECB’s incrementally aggressive approach lessens the likelihood of an event risk materialising.
• US macro data has improved to an extent, but lead indicators point towards a weak growth. Slowdown is spreading to EMs including China; 2012 to see growth taking precedence over inflation in policy actions across the region.

Indian Economy: More than a normal business cycle slowdown

• Policy paralysis, fiscal slippages, monetary tightening and uncertain external environment are weighing heavily on the investment cycle. Rate cuts alone would not be adequate to engineer a turnaround.
• Current macro decline is fashioned on the lines of 1992 slowdown even though the economy is better placed on vulnerability indicators. In our base case, FY13 GDP growth is likely to be ~7% but may slip to ~5.8% in a bear case scenario.
• Two key measures, fiscal consolidation & de-bottlenecking of coal production, can help kick start the investment cycle.

Markets: Concerns persisting, still favoring defensives

• Earnings trajectory continue to face headwinds. Our base case Sensex for is INR1,261, already downgraded by over 10%, with the risk of further downgrades looming large. However, our bear case estimates put earnings at INR1,143 (GDP growth at 5.8% and USD-INR at 52).
• On an absolute basis, valuations seem fair and below long term averages. But compared to peers in ‘BRICS’, India is still expensive as FY13 numbers face the risk of further downgrades.
• Given this fragile outlook, the Sensex is likely to be range bound between 14,000-17,000.
• Key themes to play: (a) weak rupee to support earnings in export oriented sectors (maintain OW on pharma , move IT to EW from UW) (b) domestic demand remains healthy (maintain OW on consumer sector) and (c) no immediate visibility on revival of capex (move industrials to UW).
• Model portfolio: Outperformed Nifty by 200bps in CY11; since CY09, outperformance has been by ~400bps.

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