The Hindu Business Line : Market View

There has been a re-rating of the prospects for the banking sector in the last month, primarily triggered by the change in interest rate expectations. From fears of higher inflation and monetary tightening in May, which sent equity and debt markets into a tizzy, the outlook for interest rates has turned optimistic. The fall in 10-year yields from 8.7 per cent in July to 7.7 per cent in mid-October means the Government security holdings, which suffered a mark-to-market loss in the last two years from rising rates, would for the first time post gains from falling rates.

The strong credit growth has also been accompanied by a higher lending rate, as banks have been able to pass the earlier rate hikes over to the borrowers. The rising fee-based incomes and lower levels of non-performing assets translate into more steady and sustainable net interest incomes. Therefore, the combination of factors point to a better earnings outlook for the year ended March 2007, the current earning season confirm much of this optimism.

OptiMix View and Outlook

India Inc remains in an investment mode, as the situation of excess capacity has been corrected; healthy demand levels and enhanced balance sheet strength also spur the process.

The Government's thrust on infrastructure is playing no mean role. Despite the recent rise, we expect interest rates to settle at far lower levels than in the past and this should provide a fillip to the investment phase that will lead to long-term benefits.

Sundaram BNP Paribas Mutual

The Indian market may indeed trade at a 50 per cent P/E premium over other emerging markets but it also has a return on equity that is 50 per cent higher than that of the average emerging market. Furthermore, given the relatively less cyclical composition of the Indian equity market, earnings growth has been more stable in India.

A regime shift across the equity spectrum is possibly in the works with large capitalisation stocks too starting to outperform across different markets. The valuation gaps between cyclical and stable-growth companies or large and small stocks have narrowed down considerably, implying there is little scope left for value buying. A more eclectic investing strategy needs to be adopted.

To be sure, the investing environment may not completely swing back to the go-go growth years of the 1990s, when investors were willing to pay a substantial premium for companies that showed momentum in earnings growth. However, it is quite likely that the mind-numbing days of blindly buying low P/E stocks is over.

Morgan Stanley Growth Fund

The mid-cap side of the market recovered from the fall, albeit slowly, as value buying emerged. However, the up-move has been very selective and even as the index has almost reached the previous top, a large number of mid-caps are below their previous highs by 10-40 per cent.

The poor breadth of the market suggests that investors preferred large caps to mid caps, thereby giving an opportunity to pick quality mid-cap stocks at reasonable valuations now.

Tata Mutual

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