Market Strategy

November saw significant action being taken by several countries to defreeze the credit markets and protect their banking systems. Large fiscal stimulus was announced by the EU and China. India also took measured steps first to enhance liquidity in the system and then to soften borrowing costs. Fundamentally, India remains on a relatively better footing (albeit with slower growth) with no significant impact on the banking system, in our opinion. The potential slowdown in the Indian economy has impacted equity markets which, in our opinion, are now discounting the same.

Valuations at about 10x-11x current year earnings, are not demanding, though they are higher than most Asian peers, according to consensus estimates. Falling commodity prices provide comfort on the inflation and interest rates front. We believe that, fiscal / monetary measures and higher risk appetite (stabilization in FII flows) will be the triggers for an up-move in the markets. We maintain that, in the short term, markets will focus on potential government (fiscal measures) and RBI actions (further interest rate cuts) to contain the slowdown in the economy. Adequate measures and forceful implementation may moderate the economy's slide and also the liquidity outflows. However, till that time, markets are expected to remain choppy and if the measures fall short of expectations, we may see lower levels.