Market View

Post the Federal Reserve decision to cut the Fed Funds rate by 50 basis points to support liquidity and bolster the economy mid week we saw markets rally. This rally was accentuated in emerging markets as the risk trade was again reignited. However, this is a broader statement which needs further examination. Currencies are likely to play a role in global allocation of funds as investors reallocate those depreciating towards appreciating currencies. In fact if you look at flows of funds last week, we saw only a trickle in international funds flow, in comparison to emerging market funds. We expect further rates cuts over the next 6 months to address the situation in the US and UK. This will place a continued upward bias on emerging market allocation.

 

All above returns are upto 21st of September 2007. In this environment investors are likely to re-assess exposure to the US, UK and other markets which may be impacted by the sub-prime issues and depreciating currencies. In essence these may be seen as more risky markets than emerging markets. Markets like China and India will be primary benefactors as growth is visible and more reliant on domestic factors. This indeed would be a sea change to investor mentality and we feel it is likely to happen sooner rather than later.

 

India Strategy

 

We remain bullish on the prospects for India being a more attractive investment destination for investor funds. In the last report we stated a view of 5,500 to 6,000 by the first quarter of 2008 based on this bullishness. In this environment we expect Large Cap stocks to dominate the move upwards as

 

FII's will focus on more liquid counters which are $1 billion or higher in market capitalization. Accordingly the small and mid capitalisation stocks are likely to show a lagged impact, however the political risk stands in the way of a unified local market appreciation.

 

In fact local mutual funds are likely to be sceptical due to their views on political risk and the impact it can have on the market. Local valuations are also likely to blown out of proportion for the time being as liquidity takes hold. We do not expect this situation to be ongoing, but may last till year end in a similar pattern to October, November 2006.

 

In addition sectoral positioning and stock picking abilities will be the major differentiator in performance. There are isolated ideas on rupee appreciation (underweight IT and Pharma) and a falling interest rate outlook (overweight Banks and Housing related). These positions are likely to be accentuated in the current market with players likely to follow a momentum based strategy.