Salient to Investors:

Indian policies to lure foreign investors are driving the nation’s largest money managers to buy automakers, property companies and metal producers that stand to benefit most from a recovery. Overseas investors bought a net $24.2 billion of Indian stocks in 2012, the most among 10 Asian markets excluding China.

Sunil Singhania at Reliance Capital Asset Mgmt is buying property and engineering stocks and says the government will move ahead with reform – from here, growth will only inch up along with earnings and reforms.

Sampath Reddy at Bajaj Allianz Life Insurance is selling drugmakers and telecommunications shares in favor of mining companies and consumer discretionary stocks.

Mahesh Patil at Birla Sun Life Asset Mgmt has switched from defensive stocks to cyclical stocks that would gain from a cut in interest rates. Patil says the earnings downgrade cycle has bottomed out, boosting sentiment, and economic growth will normalize in 2013. Patil expects a 15 percent return from the Sensex in 2013, mostly coming in half1.

Standard & Poor’s said a credit rating downgrade is likely if India’s political climate worsens and the pace of fiscal reforms slows.

The BSE Fast-Moving Consumer Goods Index trades at 34 times estimated profit, more than double the Sensex valuation. The Sensex trades at 15.3 times earnings versus 17.8 times for the Bovespa, 5.5 times for the Micex, 10.8 times for the Shanghai Composite, and 12 for the MSCI Emerging Markets Index.

Sanjeev Prasad at Kotak Institutional Equities said we have a long way to go to have a meaningful impact on India’s fundamental problems, while the political atmosphere is still dysfunctional and non-supportive of big-ticket reforms.

Goldman Sachs upgraded Indian equities to overweight from market-weight, citing a strong recovery in growth in 2013. Tushar Poddar at Goldman Sachs sees a high likelihood of a 50-basis point reduction on Jan. 29.

Morgan Stanley, JPMorgan Chase, and Bank of America forecast gains for Indian equities in 2013.

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