Specifically if we look at India there are currently more negatives than positives in the near term.

India faces an uncertain political environment, a WPI of 11.9 percent (4 July, 2008) - the highest in 13 years, a widening trade deficit and a depreciating rupee. The once "darling" of Asia for 5 years is now feeling the pain of global de-leveraging as foreign investors slash their exposure and their appetite for risks.

The Indian political situation remains fluid even though the present government has won the vote of confidence.

Given a likely economic slowdown we believe an early election is unlikely. Investors should therefore focus mainly on the RBI and how it handles these cyclical headwinds.

Why are investors now so negative? On the plus side India Inc delivered good earnings in the March quarter (21 percent year-on-year).

Equities are now less expensive than earlier this year, at around 15 times of 12-month forward earnings. We still believe India can grow at 6-7 percent for the next couple of years with EPS growth around 15-20 percent. Our India team expects the RBI to raise rates by enough to contain inflation while still allowing for solid GDP growth.

However, the near-term outlook for the Subcontinent still looks murky as a consequence of numerous domestic concerns coupled with the "perfect storm" that is battering the world economy as we speak. Soaring energy costs are compounding a slowdown in the G7 economies, which have already been severely bruised by the subprime fallout.

It is hard to argue that the global supply shortfall has been so severe that the price of crude oil had to soar by over 100 percent in the past 12 months. Among the emerging markets, India has suffered most from the crude oil price spike YTD. Thus the BSE should enjoy an above average rebound on any significant correction to oil.

The Bombay Stock Exchange's Sensitive Index has declined 35 percent this year on the above concerns and pressures, with inflation driven by food and $145/barrel of oil and higher borrowing costs hurting growth.

However, Asian markets, including India, will continue to operate in an environment of heightened uncertainty.

Rising energy costs appeared to have reached a choking point by mid-2008. It probably requires a consolidation or correction in oil before we see markets like India, whose economy is dependent on imported oil, regains lost ground.

In a nutshell, although the outlook is turbid, a short-term rally is highly likely.

The author is head of Investor Communications, JF Asset Management.

(HK Edition 08/01/2008 page3)