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India Update: Time for Contrarian Strategies

The recent few days have confirmed our stance since May 2011 that the Indian markets were indeed weak fundamentally. We continue to maintain that same stance even at current levels of the S&P CNX Nifty (Close Today: 4706, down 2.15%) and recommend the following two strategies to clients who wish to play a bounce in India but wish to stay protected as well

1) Going Long on beaten down stocks - We would recommend staying short on the Nifty and accumulating stocks like BHEL,ICICI Bank, Bajaj Auto and Bharti Airtel for the next few days. These stocks will react much more sharply to upsides and likely fall lesser during downsides.

2) With global growth data confirmed to be worse than earlier estimated, it makes sense to go long on long duration Gilt Funds as the Reserve Bank of India would have to, sooner or later, ensure that market expectations of long term yields move down. Though there does still remain a potential downside, the upside in our minds is quite high. We have been bearish on debt funds till now but believe these are now in a position to deliver good returns over the next two years, and especially if the global situation worsens further. The only risk in this remains a potential RBI intervention to stop rupee depreciation (and thus sucking away money supply) though we believe the RBI may not attempt it too aggressively as 1) limited reserves to fight a global phenomenon with and 2) the Real Exchange rate is still lower by 4% odd and it doesnt make sense to artificially keep the rupee inflated except to control inflation.

A combination of these strategies may give clients upsides with limited downsides in either case - upside or downside surprises. We recommend a roughly half allocation to each strategy at the current juncture.