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Yo-Yo Markets + Range Bound – Credit Suisse

August 24, 2008

Credit Suisse expects the Sensex to repeatedly touch both extremes of the 13,000-16,000 band in the next six months. At each extreme, are advised to prepare portfolios for a market move to the other. Some of the key negatives that are factored in – soon to stabilise inflation, a peaking monetary tightening cycle, diminished earnings expectations and stable global commodity prices.

In the last eight months, the Sensex has done more of a “yo-yo” than in any full year since 1995 There have been 13 rally and reversal episodes this year so far – the highest in any year since 1995. 1998 and 2000 had 12 such episodes. There have been six rallies and seven reversals so far this year, with the Sensex moving by at least 7%.

Long-term investors should wait for more data before increasing exposure significantly. Expectations of rate declines or current valuation levels are not enough to lift the market. Given local political risks, rising credit quality concerns and dependence on global risk aversion, the market could break down rather than up. Positively, almost all valuation charts have reached their best point since 2006.

Short-term investors should play frequent rallies and reversals by adjusting financial/industrial versus pharmaceuticals/staples. All historically successful quantitative investment strategies have stopped working in this environment. Rather, financials have emerged as one of the top-two outperforming sectors in every rally since February, and one of the top-two underperforming sectors in every reversal. Industrials are not far behind financials as high beta performers in every market half-cycles.

Lastly, valuations would be proven cheap enough only when growth returns back to India Inc.

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