India: Downside To Continue In Q2-Merrill Lynch

India Snapshot

Merrill Lynch

Expect More Declines in Q2 2008, things might settle by Late Q4 2008

 

Unprecedented, unseasonal rains in the entire North-West parts of India have lent a crippling blow to the Rabbi wheat crop which is now ripe for harvest. While the GOI can announce support to farmers by announcing a higher procurement price for Wheat, the spoilt Wheat may be picked up a bail-out measure in vast tracts of Rajasthan, Punjab, Haryana and West UP which are not UPA strongholds anylonger. The rippling effect will be even higher food inflation, than the 7 per cent WPI announcement that came last Friday.

 

More knee jerk measures from a panicking GOI are now possible, and even tighter credit from Banks, India will continue to decline in Q2 of 2008 even though there might be an occassional rally of the Bear squeeze variety..expect things to settle by Q4 2008 and nothing before that..

 

The following are the stocks which are likely to under-perform in a falling market:

 

1.Utility stocks (NTPC, Reliance Power and Tata Power), SAIL and Larsen & Toubro.

 

2.Engineering and Construction stocks Larsen & Toubro, Bhel, ABB, IVRCL, Nagarjuna Construction and Suzlon, metal stocks like Hindalco, SAIL & NALCO, Utility stocks like Tata Power, Reliance Energy and stocks with embedded values like Reliance and Ongc which are still carrying higher PEs than their historical mean PE ratios.
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