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And What is HSBC’s India Strategy ?

October 17, 2008

If you are a regular reader here, we started recommending HSBC and also track their Sr. Fund Manager, Mr. Duggal. We now present to you an insight on HSBC’s India investment strategy. Indian markets continue to face headwinds in the form of global risk aversion and deceleration in corporate profit growth due to slowing economic activity. Risk aversion is unlikely to end soon but don’t expect it to get worse either. India’s Growth slowdown is part of a normal cyclical downturn and will work itself out.

FII Holding in Indian Stocks can be a major risk as they continue to liquidate their positions else where to save their parent companies. This is one of the major risks. However, even GDP growth of 7.5% in the current fiscal year and 7.3% next fiscal year and earnings growth averaging a 10-12% CAGR over the same period represents strong performance. If this performance is delivered India may reappear on the radar screen of foreign investors. [De-coupling Theory will Surface]

The valuation of the Indian market has declined considerably and is now below historical levels. For instance, the Sensex is at 9.7x 12-month forward PE, compared to the average of 12.8x and the historic low of 7x. This level is reasonable, but not rock bottom. India is the most diversified stock market among emerging markets by share of the top-three sectors in market capitalisation and earnings.

Timing the bottom is difficult, and downside risk is likely, but we believe the markets are close to trough. HSBC’s index target of 15,000 for end-2009 assumes 25% recovery from our 2008 end target of 12,000. It is time to start incrementally increasing risk in portfolios.

HSBC is underweight on Real Estate as cheaper valuations also mask the impending decline in property prices. Underweight on Banks as risk of rising NPLs. neutral on IT, Healthcare and Energy. Positive on Telecom + Consumer Goods.

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