>Nifty changing to free float method (KR CHOKSEY)

Proposed changes in Nifty composition

The National Stock Exchange (NSE) has announced that it will switch to a free float market capitalization methodology for calculating the value of the S&P CNX Nifty against the full market capitalization weighted methodology used at present. The new formula will come into effect from June 26, 2009.

Our Key Findings

• Weightage of a stock in the Nifty will be proportional to the public shareholding (non-promoter holding – free float market capitalization method)

• Till now, the weightage was proportional to the market capitalization of the company. So, a company with low public shareholding, but high market capitalizations used to have a higher weightage. This is set to change.

To see full report: NIFTY

>INDIA ECONOMICS (Morgan Stanley)

Road Infrastructure Development – Taking Stock of Progress

Infrastructure spending – critical in the current economic environment: In the current domestic growth environment, while the private business capex is likely to suffer, we believe that the government’s effort to push infrastructure spending will be critical. Within the infrastructure segments, we believe the roads spending is the most important considering its strong multiplier
effect.

Tardy progress in development of roadways over the last few months: Of the total 33,097km planned, only 10,858km had been completed as of February 2009. About 50% of roads tenders have yet to be awarded. According to the monthly data released by NHAI, not a single project was awarded between August 2008 and January 2009 even though there was some pick up in the month of February 2009.

Three key reasons for this poor performance: (a) funding constraints for the private sector on account of deteriorating global and domestic credit markets as well equity markets; (b) change in regulations related to public-private partnership contracts, which has added some uncertainty for the private bidders; (c) typical execution hurdles including land acquisition, removal of
existing structures, and getting the environmental and forest clearances.

Bottom line: We believe that the progress on road development is likely to be tardy until the end of 2009. The new cabinet, which should be in place by June 2009, will need to spearhead this spending and, if need be, take the financial risk on its own balance sheet for such investments as the private sector could remain shy.

To see full report: INDIA ECONOMICS

>Gem Trading Note (MERRILL LYNCH)

Inflection Points & Trades

Three big inflection points for markets in past 9-12 months

• July 3rd ECB hikes rates (possibly one of great policy blunders of recent years); commodity prices peaked the very same day (Baltic Freight, Euro, inflation expectations peak same time); EM equities start to underperform as global growth expectations fall.

• Sept 15th bankruptcy of LEH; initiates de-leveraging and vicious collapse in EM equities/currencies as growth expectations/risk appetite sinks and US dollar surges.

• November 10th announcement of big Chinese fiscal stimulus; CRB troughs vs. S&P500 and EM starts outperforming again as global growth expectations find a floor. Chart 1 tells the tale...

Play a recovery in risk appetite
Last week's Merrill Lynch Fund Manager Survey showed a distinct gap between (recovering) growth expectations and (rock-bottom) risk appetite. But risk appetite turned up in the past week due to a) US/UK/Swiss/Japanese Quantitative Ease (QE) and b) US financial policy (PPIP) to reduce toxic assets. QE has caused a bounce in risk appetite. A genuine inflection point for risk (following bounce in growth expectations) would see:

1. Asset allocation by pension funds out of bonds into equities

2. Outperformance from banks, Europe & EMEA

3. Euro-yen taking out 200mda @ 138

4. 30-year US Treasury yields moving above 4%

5. Rise in US breakeven inflation rates which have strong correlation with many risk assets (e.g. Brazilian real – Chart 2)

Trades…
MSCI EM index target is 650-700 or EEM at $28. Long Russia, China, Brazil our favored ways to play the story in EM

FMS highlighted improvement in risk appetite most positive for EMEA, Korea, Poland, banks, industrials, materials in EM

The trade ends when/if growth rollover later in spring (watch BDIY, China Ashares, China PMI, G7 demand, trade, housing and so on)

To see full report: GEM TRADING

>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