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HSBC Overweight on Energy + Financials

May 11, 2009

India has been one of the best performing markets since mid March with ~ $2.0 bln of FII inflows moving into Indian equities in the past 2 months. Expect to see signs of stress on account of the slowdown, Indian companies’ earnings have been among the least volatile among emerging markets. Earnings are likely to remain under pressure for the next one to two quarters, as the full effects of the earlier monetary tightening measures and the credit squeeze feed through the economy.

Indian markets will continue to take cues from global developments and global market movements. The correlation of Indian markets to global markets has increased significantly over the last 12 months.

HSBC remains positive about Indian equities over the longer term, but near term market movement is likely to depend on FII flows and election news flowand results. Based on historical trends, equity valuations remain reasonable at 11400 levels. At 11500, India trades at a P/E of 13.5X FY09e EPS and 12.5X FY10 estimate.

Long term investors could use an SIP approach over the next few months. Clients with high risk appetite could look at initiating exposure to mid cap funds and stocks as the valuation gap to large caps continues to increase. Given the severe correction in mid caps during CY2008 and the underperformance in the recent rally, there appears to be more value in mid caps.

HSBC is overweight on Energy and Financials. Underweight on Real Estate and Healthcare. Neutral on IT, Capital Goods, Materials and Industrial Metals.

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