We recommend investors stay invested in order to play eventual global and domestic economic recovery. Fair-to-full valuations of several large-cap. stocks prevent us from taking a more aggressive view; we do not see concrete evidence of earnings upgrades yet. We stay with banking and commodities as the best ways to play the economic recovery theme, especially as their valuations are still relatively inexpensive versus those of other sectors.

Stay invested to play possible recovery in economic activity and earnings
We recommend that investors stay invested in order to play (1) likely recovery global and domestic economic recovery and (2) possible earnings upgrades related to economic recovery. We stick with banking and commodities (our preferred high-conviction ideas over the past six months) to play the economic recovery theme.

14,000 (+20%) for BSE-30 Index may be possible with earnings upgrades, liquidity
In our view, the BSE-30 Index can rise 20% to around 14,000 by end-CY2009 with impetus from (1) possible earnings upgrades and (2) continued positive investment sentiment. We do not yet see concrete evidence of sustained earnings upgrades given global and specific domestic issues in several sectors. A liquidity-driven rally based on euphoria alone may not sustain.

Stable government and like-minded coalition partners to help investment sentiment
We see the inevitable formation of the UPA government (262 seats out of 543 in the Lok Sabha in the 15th national elections) as a positive for the market since it represents political and economic stability. Also, the Indian National Congress (INC) is stronger than before with 206 seats against 145 previously. This gives it the strength to push economic reforms without much opposition from its coalition partners.

Full valuations of marquee names and large fiscal deficit may rein in markets
(1) We do not find meaningful value in many large-cap. names after the strong rally of 36% in the BSE-30 Index over the past two months. They are trading above our FY2010E-based valuations and near/above our FY2011E-based valuations. (2) The continued high fiscal deficit may result in higher interest rates in 2HFY10E and FY2011E without mitigation from strong external capital flows.