Edelweiss’ Equity Strategy for India 2010

We have mostly covered Equity Strategies of FII active in India. There are over 400 FIIs active on their own license or through the backdoor Promissory Note route and not all of them have their own dedicated Research Houses and hence rely on the Strategies of the FIIs you have already read. Today we would like to have a look at what is Edelweiss’ strategy for the Indian Equity Asset Class.

Liquidity to continue supporting Indian equities in the near-term however as we go forward volatility will remain high. EMs like India – which are passing through a phase of structural upsurge in growth – have often enjoyed clusters of great equity market returns. During the five-year spell of CY03-07, except in CY04, every single year posted a return of over 40% for the Sensex.

India looks attractive as an investment destination. However, given the current valuations, which are enjoying a premium over EMs, investors will keep spotting value. A proactive bottom-up stock selection will hold the key in CY10 and any recovery in the Global market will be a Double Edge Sword in favor of India.

Interest Rates:
Globally, particularly in developed nations, stimulus unwinding is likely to be slow as policymakers would rather prefer to err on the side of caution than putting growth recovery at risk. RBI is poised to make a “calibrated exit” from the current overtly accommodative monetary policy and will hike policy rates (repo/reverse repo rate) and/or reserve requirements (CRR) during the first quarter of CY10. However, note that India immune to fears of any rollback in stimulus as it focused on real areas of the economy and not on bailing out institutions.

Weak Greenback / USD, Nations Move Towards Gold:
Expect the USD to remain weak during CY10, primarily driven by – surging federal deficit and large treasury issuance. Sharp expansion of the Fed balance sheet and improved risk appetite globally, reducing significance of the USD as safe haven. Several emerging markets (EMs) shifting their reserves from USD to gold.

Emerging Markets are set to outperform the developed world on the back of strong capital flows. India, with strong visibility of high and stable growth, is likely to benefit more than most of its peers. India’s low export dependence makes it less vulnerable to an appreciation of the domestic currency.

Recovery Indicators – Edelweiss Exclusive:
Lead indicators pointing to near term uptick – Turnaround in Indian manufacturing is reflected in an improved outlook and signs of recovery. November witnessed a huge turnaround in commercial vehicles production, indicating a strong pick-up in activity. Besides, the India PMI Index has stayed in the expansion zone of above 50 for the eighth month in a row. ET-Now Lead Indicator Index has scaled from a trough of ~73 in Q4FY09, EELII touched ~103 in Q3FY10, crossing the 100-mark for the first time since September 2007.

On Inflation:
Inflation has already touched 4.8% and is expected to be in the range of 8-9% by March 2010. A large part of this high inflation has been contributed by supply-side shocks in both domestic and global markets. Domestically, food prices are up ~18% Y-o-Y. In the global market, the recent upsurge has been driven majorly by prices of commodities like metals and fuel for which India is a complete “price-taker” in the global market. Real Demand for commodities from Developed Economies will only kick-in next fiscal and thus the speculative element already built in will cool off, helping India.

India is currently enjoying a valuation premium over most other EMs. Such premium for India over other EMs has, however, been the trend in the recent past and is likely to continue going forward. They go with consensus estimates for FY11 earnings for the Sensex at Rs 1054 currently with scope of upward revision.

Finally, key concerns would be continued supply of papers / IPOs, GoI’s failure to deliver, and faster-than-expected stimulus withdrawal can be a near term dampener.

You can read the Top MidCap Picks of Edelweiss which we covered last month.