§ We believe that India will be in a ‘sweet spot’ in 2008, with domestic growth bolstered by capital flows even as the US slows without slipping into recession. We explore the key themes that we think will dominate 2008.
§ The economy. In terms of macroeconomic factors, we see a “sweet spot” scenario playing out for India. Growth will slow slightly in the first half of the year, but much of that is already in expectations. We believe that the US will not slip into recession but could escape with a slowdown – which should keep liquidity abundant and, despite the RBI’s concerns, interest rates drifting down. All this plays out into a sharp bounceback in 2H08. The big risk is, however, that we are wrong on the US and there indeed is a recession; India will offer plenty of places to hide in that scenario. Our pick is telecoms.
§ Policy – elections cloud the scenario. Policy will be dominated by elections – scheduled in 1Q09 but possibly brought forward by a fluid political scenario. We revisit our list of key policy measures that could be affected by “election inertia” and find that some issues have changed. We think the best play on the elections is the infrastructure and capital goods space, as the government races to finish projects ahead of the polls.
§ Themes of the year – spin-offs and sell-downs. As liquidity chases stocks in India, we see companies realise value in subsidiaries and ancillary businesses during the next year. Almost all sectors have a play in this – insurance subs of banks, towercos out of telcos and asset spin-offs from infrastructure companies are three such examples.
§ Comfortable with valuations. One common concern among investors is whether India is too expensive. We do not share that fear: India is below historic peaks, despite interest rates being lower and GDP growth faster. Even compared to other regional markets, India’s valuations are respectable, despite the fast pace of growth and deep markets. We stay with our view that India will structurally re-rate over the next few years.
§ India is now too important a market to ignore and we recommend investors stay invested. We think that 2008 has the possibility of being, yet again, a great year for the Indian market. Our end-year index target is revised to 24,000, while we recommend investors stick with three simple themes – domestic consumption, easing rates and capital spend. Our top picks in the country are therefore DLF, Reliance Communications, HDFC Ltd, Tata Steel and Reliance Industries. Our top Underperforms are ONGC, SBI and Maruti Suzuki