>GLOBAL STRATEGY (MORGAN STANLEY)

Buy Large Cap "Quality” (stocks to own through the cycle)

• As we look through to year-end 2010, we think the backdrop for equities will be one where sentiment swings from periods of extreme optimism (selling the market) to extreme pessimism (buying the market). We think the best way to position in this environment is to be overweight themes that look through the volatility of the cycle, but to also be prepared to take on and shed
additional risk as market condition dictate.

• There is clarity on the start of growth recovery but not on its strength. For this reason we want some exposure to the cycle, but look for areas/industries which will still stand to benefit even if growth disappoints. In this regard, our investment themes out to year-end 2010 are a mix of those which help determine “core” portfolio holdings (stocks to be held through the cycle) and those which are more growth leveraged.

• If a key feature of the 2008/09 equity market sell-down was the indiscriminate de-rating of high and low quality stocks alike, then a key feature of the rally has been the significant re-rating of the low quality names. Many measures (forward earnings yield, PEG) now show the valuation dispersion below normalized levels.

• In our view, the intensity of financial and credit market disruptions continues to impact growth visibility, and a tight valuation distribution implies that you can now buy higher quality, stable growth names with low earnings risk, strong franchise values, dividend sanctity, and a strong balance sheet at similar valuation levels to lower quality, more cyclical stocks. We think the high quality names have the potential to be strong outperformers - not for the near term but over a number of years.

• To date, the risk rally has nearly corrected the entire underperformance of low quality/cyclical stocks through 2008 and early 2009 (page 5). However, the rally has been driven almost entirely by multiple expansion – clearly most evident at the low quality end of the market (page 5). Historically, the multiple expansion phase of the cycle has lasted around a year and has seen the average P/E expand by approximately 50%. From the low of 666 on the S&P to the current level ~1000, we have now seen this occur.

• While there still remains a reasonable dispersion across “Value” factors (all value is not equal), a number of valuation metrics (forward earnings yield, price for growth) are now supportive of high over low quality stocks.

• With Valuation, Sentiment and Fundamentals still reasonable, the equity market may climb higher. We would look to see a deterioration in breadth and for technical factors to become more overbought before we would become more concerned. However, we think the low valuation dispersion between high and low quality stocks means the best value is found in the former.

To see full report: GLOBAL STRATEGY

>NAVIN FLUORINE (WAY 2 WEALTH)

WHY NAVIN FLUORINE ???

INVESTMENT IDEA

• Largest integrated fluorochemicals complex in India with hydrofluoric acid capacity of more than 20,000 tpa – provides ability to speedily address new requirements of customers.

• Co has got a healthy mix of domestic and export sales. While refrigerant business is domestically doing well, export business margins are fluctuating. The products are sold under the brand name “Mafron”

• Bulk chemical business is subject to some competitive pressure. However, specialty fluoride is growing at high pace (3 yr CAGR: 18%) and the co is a leading global player in BF3.

• Key clients – Top five global crop protection companies like BASF and Bayer Cropscience; domestic clients includes Ranbaxy, Matrix, Aurobindo, Hetero, Orchid, Lupin

• Phasing out CFC as per Montreal Protocol, will be more than compensated by HCFC business, which finds its application into air-conditioners and refrigerators. HCFC business window is open till 2040.

• Consulted Mckinsey & Co to identify areas of cost reductions and profit improvement.

• Income from sales of Certified Emission Reductions (CERs) will further improve the financial profile of the company. (Refer to next slide)

• Healthy B/S and will become debt free in the current year; strong return ratios as well.

• High dividend yield of 5%

• Substantial recovery of dues from the group company, Mafatlal Industries, is expected as per the Chariman’s speech at the AGM

• Valuable property at Mafatlal Centre, Nariman Point will be free of lease by 2012.

To see full report: NAVIN FLUORINE

>MOST HATED & LOVED STOCKS (ICICI SECURITIES)

India’s most ‘hated’ & most ‘loved’ stocks

We have run a couple of screens (Tables 1&2) for our clients who are looking for contrarian bets. The BSE-100 list of companies has been screened for consensus recommendations. The most hated stocks are those covered by minimum 10 brokers, of who at least 60% have a SELL recommendation. At least 60% of the ratings for the most loved stocks are BUYs.

From I-Sec Research’s perspective, the one stock that stands out is Ranbaxy – 32 brokers cover it, 75% of them think it is a SELL, and the stock has underperformed the Sensex by over 40% in the past 12 months. Our pharma analyst, Rajesh Vora, recently upgraded the stock to BUY (refer our note ‘Ripe for a turnaround’ dated August 10, ’09) based on the argument that the worst developments on the US FDA front are behind us and two of the company’s blockbuster products may hit the market in the next eight months.

To see full report: MARKET STRATEGY

>WHERE ARE THE BEARS ? (MERRILL LYNCH)

■ Fear fizzles out, but optimism only skin-deep
August FMS a feast for contrarian, tactical bears. Headline data reveals strongest market sentiment in two years. Big turnaround from apocalyptic bearishness of March. But underlying data shows lack of conviction. Four out of five investors predict a “below trend” recovery and neither regional nor sector positions are extreme. The optimism is skin-deep.

■ Only 8% of investors expect weaker economic growth
Consensus (75%) expects some sort of global recovery. Few expect a “double-dip”. This means “weaker-than-expected” data in coming months would be negative forequities. Next set of Chinese & US data now crucial for September direction. China growth expectations dipped again (to 49%) in the August FMS.

■ Cash balances plunge to 3.5%, lowest since July’07
Strong inflows now required to fund further equity and credit rallies or investors likely to raise cash. Highest equity allocation (34% from 7%) since Oct’07; bond allocation (-28% from -12%) lowest since April’07.

■ Optimism built with narrow regional leadership
EM equities (52%) by far the big OW. Asset allocators UW every other equity region, although the Eurozone UW was narrowed considerably (from -23% to -13%). Note, GEM investors sharply cut exposure to Chinese equities to neutral.

■ Optimism built with narrow sector leadership
Tech (28%) the most favored sector everywhere. Big monthly jump (-11% to 11%) in exposure to industrials. Defensives (telco, staples, pharma) cut back to neutral, while utilities (-15%) most detested global sector. The underweight in bank stocks narrowed (to -10%), but investors remain UW the credit plays.

■ Contrarian long & short trades
Contrarian longs: Japan, US, Asia utilities, US & UK banks, UK & Eurozone real estate, Asia telco, EM materials. Contrarian shorts: US, Eurozone, Japan, Asia tech, EM consumer discretionary, Asia and Japan banks, Russia.

■ Our view: there will be dips…buy them
Short-term pullbacks often coincide with a bullish FMS. That’s happening. But August optimism feels grudging and only skin-deep to us. We remain cyclical equity bulls and buyers of dips. August FMS resembles June 2003 FMS, when big reduction in cash balances (4.9% to 3.9%) and increase in equity allocation (3% to 22%) caused a nascent cyclical bull market to pause for breath. The bull market resumed a few months later.

To see full report: FUND MANAGER SURVEY