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JP Morgan Upgrades India after a Year

January 8, 2009

JP Morgan equity research upgraded India to neutral from underweight. They were underweight on 18 January 2008 due to expensive valuations, high earnings growth expectations, rising inflation, high borrowing costs, weak currency and widening twin deficits. Many of these factors have now reversed. Monetary and fiscal policies have turned significantly pro-growth.

Over the past few months, RBI and the Government has taken measures to control the inflation [though Food Prices are still high] and ensure credit flow to the productive sectors rather than fuel a bubble in Real Estate and restructure debt where needed.

The government lifted the interest rate cap on external commercial borrowings and permitted infrastructure dedicated NBFCs to use this route. Also, a SPV will help refinance high-quality but illiquid assets held by NBFC.

India’s 12-month forward P/E premium relative to emerging markets has decreased from 77% in January 2008 to 16% currently. Consensus earnings growth expectations for 2008 are at 1.5% and for 2009 are 9.8%. The current expectations for 2009 EPS are still too high, but have been revised down 20% in the past 12 months. The cost of money for corporates has declined. Since their peak in July 2008, 10-year government bond yields have fallen from 9.4% to 5.1%.

Satyam Computers Scam is a company-specific problem. India has a vibrant press and developed regulatory and legal structure. It is the efficient operation of this system, particularly relative to other emerging markets, that long term investors should focus on.

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