> QE discounted? (CLSA)

Despite the continued downward earnings momentum in corporate earnings, MSCI India has moved up by 5% over the last one month on increasing probability of further global monetary easing. While India is the best risk-on market, our analysis of the previous six global liquidity
events highlights that market performance has been weak post facto if the index has already moved up on anticipation, which seems to be the case now. Our global strategist Chris Wood warns of a risk-off in 4QCY12. We further increase weight in the defensive pharma funded by cutting Tata steel. Private banks remains key OWT.

QE hopes partially built-in, post facto performance may not be strong
■ Our recent micro strategy report ‘Breaking macro barriers’ highlights India as the top pick in Asia in in the event of global money printing.

■ A possible favourable action/hints by the upcoming US Fed and the ECB meeting in early September can cause the Indian markets to move up.

■ We, however, note that Indian markets already up 14% ytd in INR and 8.5% ytd in US$ makes India the best performing large Asian market.

■ Some of the easing hopes are already built-in. Our analysis of the previous five global liquidity events highlights that market performance has been weak post facto if the market has already moved up on anticipation.

Incremental QEs have had limited impact
■ After the initial QEs in CY09, incremental QEs have had diminishing impact on the Indian markets. We have observed that the Indian market has reversed part of the initial gains in the subsequent two months. In five of the six global liquidity events, however, financials have outperformed.

■ On a separate note, the RBI has been infusing liquidity locally, through OMOs. RBI now holds Rs5.6trn (US$100bn) worth of Govt securities / bills on its books, up from Rs3.5trn a year ago and Rs1trn two years ago. With bank borrowings from RBI now less than 1% of deposits, more OMOs appear unlikely in the near-term.

Monsoon revival a positive but policy hopes diminishing
■ With the recent revival in the rainfall activity, monsoon is now 13% deficient from 26% deficient earlier in Jun-12. This should provide some relief.

■ However, with the recent logjam in the parliament on the ‘coal mining issue’, political situation has become more fragile. The new finance minister Mr Chidambaram has also ruled out any near-term revision in auto fuel prices.

Raising Pharma OWT, IT to Neutral; Reducing materials to UWT
■ We raise OWT in pharma by adding Sun Pharma and Cipla to our model portfolio and remove Dr Reddy’s. Sun Pharma 15%+ operating earnings growth can see further upsides through niche US opportunities like Prandin. Cipla will see margins improving with favourable currency and increasing utilization of Indore SEZ. We remove Dr Reddy’s as we see earnings momentum fading with limited number of incremental opportunities in the US.

■ The above is funded by removing Tata Steel. Falling trend in iron ore and steel prices is a negative for Tata steel.

■ We remove BHEL from the portfolio as the stock is up 10% over the last three months and orderflow outlook remains weak. Adding Adani Ports as our preferred infra play. The company should drive multi-year volume growth without much capex.

■ Private sector banks remains our key OWT due to continued better asset quality trends. However, we remove IndusInd bank on CV cycle concerns and replace with cheaper Axis Bank. Investors’ fears on Axis’ asset quality resulted in valuation derating, however the reality on asset quality has been better than expectations with stressed asset ratio of 3% among the lowest in the sector.

■ We raise IT services to neutral by adding 1 pt to Infosys as reasonable valuations coupled with under ownership forms a support. We add 2 points to ITC to maintain our 4 ppts UWT on staples, where premium valuations and risks to growth makes us cautious.

■ Our top 5 picks are ICICI Bank, Axis Bank (earlier Yes bank), BPCL, Power Grid and Lupin.

To read report in detail: QE DISCOUNTED

RISH TRADER