Adopting a contrarian view, Mumbai-based stock broking house India Infoline expects domestic equities market to generate a return of over 30% in 2009. The prediction stems from three broad views – India is relatively better positioned for stronger and faster economic growth than rest of the world, a reversal of downward pressure on the rupee due to the turnaround in current account and sharp decline in cost of capital.

According to India Infoline analysts, while corporate capex will likely take a long time to recover, public spending and infrastructure spending will hold up well. Even as cost of capital is rapidly coming off, domestic liquidity conditions have improved and thus credit availability should improve. The sharp declines in commodity prices have reduced the cost of building infrastructure by 15-25% across the board.

“Notwithstanding large declines expected in external trade, a deceleration in industrial and services sectors and the investment cycle, we believe India is well positioned to grow its GDP by at least 5-6% in 2009. Industrial growth too will likely revive more quickly, owing to large capacity additions in core sectors, especially those where growth is constrained by supply,” the Infoline report said.

Although India is still trading at a 20% premium to the MSCI EM index, this premium is lower than the average of 40% that it enjoyed over the past five and half years. Thus in a relative sense, Indian equities have been de-rated vis-a-vis emerging markets.

“The brokerage believes, FII flows will be positive in 2009, led mainly by increased weights in emerging markets and global funds. Earnings growth momentum and macro data will be bad for the next few quarters, but markets will look for growth cues beyond the next 2-3 quarters,” the India Infoline report said.

The report states that earnings growth, except in commodities and select domestic cyclicals, will either be resilient or in most cases will likely be better than what markets are pricing in, especially from the third quarter of next fiscal. The brokerage has picked Tata Steel, Suzlon Energy, Bajaj Auto, ICICI Bank and DLF Ltd as the ‘dark horses’ for 2009. India Infoline is overweight on financials and consumer staples sectors and underweight on IT and energy sectors.

source: Economictimes

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