The Hindu Business Line : JP Morgan upgrades India to 'neutral' from 'underweight'

J P Morgan has upgraded India as an emerging market destination from underweight to neutral. The recommendation on India as against other Asian markets continues to be neutral.

The Sensex target for 2005 has been pegged at 7000, according to the Asia Pacific Equity Research Report published by J P Morgan.

Detailing the changes in last year, the report said that India is the only emerging market that imposes a capital gains tax on foreign institutional investors.

More funds are investing directly in India as in the latest budget, short-term capital gain tax was reduced to 10 per cent from 30 per cent and long-term capital gain tax was brought down to zero.

"This reduction in capital gains tax has been offset by the introduction of a transaction tax. For delivery-based trades it is a nominal 0.15 per cent shared equally by the buyer and seller, and for derivatives transactions it is 0.10 per cent. CalPERs has started investing in Indian equities. This may encourage other conservative pension funds to invest in India," said the report.

Improving equity market liquidity also makes the market more accessible.

Since the beginning of last year, the average daily trading volume of Nifty 50 companies has gone up by more than 60 per cent to approximately $500 million on the National Stock Exchange.

Among the Nifty 50 firms, the number of companies with more than $5 million daily trading volume has increased from eight to 25 during the same period.

The PSU refiners' margins have fallen this year, as the Government did not allow refined product prices to rise as fast as crude oil.

This move , in order to control inflation, demonstrated the risk of owning partly privatised companies, the report pointed out. The report also detailed a bearish outlook on bonds. The benchmark ten-year yield has risen 2.1 per cent from its lows in 2004 even though the central bank only hiked policy rates by 0.25 per cent.

Despite the large adjustment already made to the turn in the interest rate cycle, the outlook remains bearish for bonds. Several cyclical trends are likely to persist through 2005 — higher policy rates, tighter liquidity, continued portfolio adjustments and strong credit demand — and will likely keep yields climbing.

It is expected that the ten-year yield could touch 8 per cent by end-2005 and that the appetite for duration risk will continue to diminish while issuance streams will remain strong, implying a steeper yield curve in 2005, according to the report.