>INDIA MARKET STRATEGY: India on sustained global liquidity conditions, and if domestic retail investor returns to equity, the risks will be on the upside (CLSA)

India has been the best performing Asian market YTD and we believe the strong performance would continue as the liquidity driven rally is now getting the policy support and corporate earnings stability. Any initiative to improve coal production and power generation, we believe, will further increase our enthusiasm. CLSA’s global strategist Chris Wood prefers India on sustained global liquidity conditions, and if domestic retail investor returns to equity, the risks will be on the upside. We continue to add more beta to our portfolios and add Tata Motors and Yes Bank to our top 5 ideas replacing ITC and Dr Reddy’s. The rising crude and potential
delays/lower rate cuts by the RBI will be a negative.


■ Liquidity rally has moved the valuations back to July level
► With the liquidity driven rally, Indian stock market has now moved back to the July 2011 level, valuations are also similar at 14.5x as time effect offset by earnings downgrade.
► Recent stock price reactions to bad results etc imply that the investors are now much more willing to look beyond the near-term, focussing on longer-term trends.


■ Initial signs of policy level improvement visible
► The Government has certainly moved beyond the policy noise to some concrete steps (refer to our earlier note: Policy Paralysis no more?). While still a few uncertainties exist, the direction is clear.
► The possibility of Coal India being able to ramp-up production whether from the existing mines (relatively easier and could be effective in a year) or the new mines (production will likely take a couple of years assuming fast-track clearances) can be rerating trigger for the Indian markets.
► With these policy initiatives and the willingness of the investors to look beyond the near-term patches makes us more sanguine about the current rally.


■ CY2012 market returns to be front ended; retail support should
► With primary markets being slow to pick-up, we believe that the CY12 market returns will be upfronted as easier global liquidity continues.
► Domestic retail investors have been virtually absent from the equity markets for the last three years (FY10-12) with 0.2% of incremental saving going into equities as against 5% as the trend prior. A reversion mean (3.5% average over the last 8 years), could bring in US$13-14bn creating potential buffer for equity issuances.


■ Adding more beta to portfolio
► Corporate earnings trend stabilising (our FY13 Sensex EPS has remained unchanged at 1,269 over the last 45 days and through the 3QFY12 results season), and earnings downgrade cycle has ended.
► We raise market target multiple to 14.5x – in line with the last 10 year average to take the Sensex target to 20,800. Rising international crude prices and possible tax hike / fuel hike may delay the potential rate cuts by RBI. This could be a risk to market sentiments which are building in large hopes on rate cuts.
► In line with the view of our global strategist, Chris Wood, who believes in continued global liquidity, we add more beta to our portfolio. We remove ITC and Dr Reddy’s from our top 5 ideas and replace with Yes bank and Tata Motors.
► We raise weight on financials by 5 ppts to become OWT. We also raise industrials to Neutral (+2). Lower pharma by 4 pts to UWT from OWT earlier. Weight in IT also cut but 2.5ppts but maintain the OWT stance. Reduce staples weights by 2ppts to increase our UWT further. Also reduce weight in Energy by 2pts to make it UWT.


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