Date:18/05/2006 URL: http://www.thehindubusinessline.com/2006/05/18/stories/2006051803211500.htm

Back Sensex year-end target is 11K: JP Morgan

India would not see a massive sell-off but could be regional underperformer

The recent volatility in equity markets was not restricted to India. Almost all emerging markets, especially Asian markets, saw a huge sell-off.

The Head-Emerging Asia Economic & Sovereign Research at JP Morgan, Mr David G Fernandez, reveals what strategies global funds are adopting now.

He says that JP Morgan is underweight on India and has a year-end target for the Sensex at about 11,000 levels. He adds that foreign fund flows to India may slow down but Indian equities are unlikely to see a massive sell-off.

Excerpts from CNBC-TV18's exclusive interview:

What is your call on India now? What is the prime concern, interest rate, inflation , or commodity market?

The call on Indian equity market that our strategists have recently put out is that they are underweight on India and have a year-end target of 11,000; primarily it is related to the stretched valuations.

The uncertainty about how far global liquidity will go as we get into this tightening cycle is the second concern. Not only do we have the rates moving higher in the G3 markets, but we also have a view that the RBI is not done either. So we put the two together and have gone into a bearish call on Indian equities.

On the back of all this, we have said that what has held the rupee up was the foreign inflows into the equity market. What do you see the Fed doing? Do you see it pausing at 5% or going ahead for 6%?

I think if the market is going to be this sensitive to the Fed expectations, then we think emerging markets are in for a rough ride. Today, emerging markets do look better especially Asia, which is looking a lot better. India is rallying, as well as Indonesia that suffered severe losses over the past couple of days. We have seen currency hold back quite smartly also.

I step back and look at what caused these jitters in the first place and what caused the relief rally we are into right now. It concerns me that the focus is on the Fed and expectations about where this Chairman is going to take FOMC next. I think that will be a question wrestling over on a daily basis, potentially for the next several weeks.

Is that going to impact fund flows in any material way, especially for markets like India?

I think we have to put in context that people have made quite a bit of money since the beginning of the year. So we are in an environment where we have already hit our four-year targets if one is a fund manager. We are in an environment of heightened uncertainty. I think we are likely to see foreign flows, which have already been pulling back in terms of their India exposure, they continue to do so during this period of uncertainty.

What do you expect - quiet consolidation or wild swings, because we haven't had a meaningful correction since October?

The other structural thing to note here is that local investors are still heavily under invested, so it would not be a massive sell-off to any degree at all, but simply a regional underperformance.

This is why we have put India as underweight, based on what we had expected to have happened in the other markets. So, it is very much a quiet consolidation view that we have.