Economic weakness, but no crisis. Market consensus has now veered
towards extreme defensiveness, and phrases like “currency crisis” and
“meltdown” are being bandied about. We have been flagging the deepening
and broadening slowdown for a while, and do not expect any meaningful
recovery in investment or middle-income consumption anytime soon. But we
also believe a crisis is unlikely: bargain-hunting selectively makes sense.
■ Market fall significant on a relative basis. The market may not look cheap
enough on an absolute basis, with a mere ~10% correction from the recent
peak. But relative performance has been extraordinarily weak: (1) in local
currency terms the market is 49th out of the top 50 markets YTD; (2) India has
underperformed global markets for five consecutive months; and (3) relative
market P/E for MSCI India is close to eight-year lows excluding the crisis.
■ Some select opportunities. The broader market doesn’t look attractive yet
as FY14 earnings have ~10% downside, and large sectors such as
Financials can still correct meaningfully. The current correction though has
been broader than those seen recently, and select stocks are starting to look
attractive: CS analysts upgraded NTPC, Cairn India and Ambuja Cements
today. We also like Reliance, HCL Tech and Sterlite. In our model portfolio
we add weights to Energy, Utilities and Materials, and cut weights in HUL.
