>EARNINGS GUIDE (PRABHUDAS LILLADHER)

TOP PICKS

Large Caps

• Maruti Suzuki
• Bajaj Auto
• BHEL
• State Bank of India
• Bharti Airtel
• Kotak Mahindra Bank
• Bank of Baroda

Mid Caps

• Mphasis
• Indraprastha Gas
• Shree Renuka Sugars
• Bharati Shipyard
• Hindustan Dorr Oliver
• KEC International
• Jyoti Structures
• Ess Dee Aluminium
• United Phosphorus
• IVRCL
• India Infoline
• YES Bank
• Edelweiss Capital
• Syndicate Bank
• Dishman Pharma
• Mundra Port & SEZ
• Lupin

To see full report: EARNINGS GUIDE

>ASIA'S EXPORT (MACQUARIE RESEARCH)

Asia’s export recovery: challenging

Asia’s exports are starting rebound
■ Asia’s equity markets remain heavily influenced by global trends. Indeed, the export cycle remains a key proxy for the region’s earnings cycle. The market’s recovery since 6 March has been truly impressive indicating two things: 1) it was significantly oversold; and 2) the global recovery is on the way.

■ As we enter the summer months, Asia’s data flow is expected to point to something of a synchronised recovery (ie, both net exports and domestic demand driving output gains). This is based on the well documented industrial destocking that will be followed by restocking now that demand has stabilised.

But the trajectory of the export recovery will flatten out
■ All of Asia’s canaries (ie, Singapore, Taiwan and Korea) are experiencing a sharp recovery in industrial production and some improvement in exports. But this is to be expected given the intensity of the output collapse.

■ If output drops from 100 to 80 and then recovers to 90, then the recovery will look V-shaped. For example, Korea’s economy contracted by 5.1% QoQ, sa, (~20% QoQ, saar) in 4Q08. A 1–2% QoQ, sa, bounce translates into a 4–8% QoQ, saar, recovery, although output is still 3–4% below peak levels.

■ With global demand stabilising, our focus shifts to the strength of final global demand for Asia’s exports and we are concerned it will disappoint. The G3 consumer, a US$25tr market vs US$4tr for Asia ex Japan, will struggle until employment bottoms. Rising energy prices are also sapping its strength.

■ Given the low levels of capacity utilisation, a capital expenditure cycle driven by the private sector does not appear likely through 2010. Indeed, there is excess capacity in the global manufacturing sector containing top-line revenues.

■ The risk is that the export rebound linked to restocking will be weak and/or further delayed than we currently anticipate. Indeed, global manufacturers are more likely to run extremely low levels of inventories if end demand is in question, reflected in a lack of pricing power.

But all of this is not necessarily bad for Asian equities
■ Although the economic rebound is expected to be subdued, this need not be negative for Asian asset markets. Indeed, one of the implications is that G3 policy will remain easy for much longer than the market expects. Fiscal policy too, may need to be reinforced and extended into 2010.

■ By extension, Asian policy is likely to remain easy as well in an increasingly liquid environment driven by the region’s rapid external adjustment. Asia has already provided significant policy stimulus; if domestic demand picks up strongly this will draw more capital into the region. Indeed, policy makers will be in a position of having to raise interest rates which will lift their currencies against the backdrop of flagging global demand.

■ We continue to believe the large domestic economies of Asia look like the best all-weather harbours: China, India and Indonesia. High-beta Asia will lose its lustre if our expectation of lacklustre recovery for the G3 plays out.

To see full report: ASIA'S EXPORT

>Buy the Rumours, Sell the News!

UPA Version 2 will undergo what is seen as its first market-friendliness test on Monday morning when Union Finance Minister Pranab Mukherjee takes the floor in the Lok Sabha to present the budget.

The hope is that UPA 2 will be free of, what the Street termed, the red bugs that crashed the first version whenever it switched to the reform mode.

Expectations soared high ever since the new government swung the numbers when the Lok
Sabha election results came in last May. Last week’s economic survey only whetted the appetite of investors and the Sensex is still shy of the 15000 mark breached soon after the polls.

Meanwhile everyone is chipping in with wish lists. As late as the weekend, corporate honchos were wooing the media to get their points in during the finishing touches to the budget
proposals.

If talking heads on television are to be believed, India is on the threshold of market reforms never seen since the economy first opened in 1991. Few are even prepared to consider the political compulsions of a government that barely commands absolute majority in parliament, forget the two- changes in the constitution.

The first signals of where the government’s sympathies lie came out on Friday’ when Railway Minister Mamta Banerjee chose people over profit, as she put it.

The government may have raised fuel prices to partially compensate the public sector oil companies for the losses suffered by them, but it falls short of the complete price deregulation expected by the market.

To see full report: INFORMED INVESTOR

>GLOBAL MARKET MONITOR (ECONOMIC RESEARCH)

Market re-assesses recovery expectations

■ It remains far too early to implement exit strategies
US employment news fell short of expectations for improvement, but the June employment report does nothing to alter the tone at the Fed. For the market it squeezes out the premature speculation of tightening. Fed officials aired early thoughts on exit strategies in the week off after the FOMC meeting. None were as eloquent as those of San Francisco Fed President Yellen, who sees the economy turning a corner, but with the main risk of inflation being too low and not too high for several years. It remains far too early to implement exit strategies, but signs of any turn in economic activity require careful consideration on timing, mechanics and political factors.

■ Market expectations falling back in line with ours
The ECB is firmly in wait-and-see mode. It feels it has done some extraordinary things to ease the banking sectors funding problems and inject liquidity into the economy. Now with sentiment beginning to improve and activity tentatively beginning to stabilise (or at least not fall as quickly), the emphasis is on standing back and waiting to see what comes next. In the absence of any more bank failures, its hard to envisage the global economy being hit by any more large shocks. The most likely scenario is probably a long period of underperformance with the economy languishing in the doldrums for some time. It is not at all obvious that the ECB is particularly sensitive to this kind of outturn. At the very least, this suggests the ECB remaining on hold for the foreseeable future with no new innovations in policy at all this year.

To see full report: MARKET MONITOR