The US, Europe, China and Asia are facing an economic downturn, with Europe being the worst hit. However, latest steps initiated in the EU summit have reduced the financial risks in the near term.

It is a mixed blessing for India. Growth & rupee are be adversely impacted, but the fall in commodities and oil prices is a big positive.

India's economic Growth will remain sub-par in coming quarters and lingering policy paralysis, weak external environment and high interest rates to impede economic activity in the forthcoming quarters. We
expect below-trend growth of 6.4 per cent in FY13E.

However, few positives are already emerging. The BoP stress is likely to ease soon and RBI is likely to turn more growth supportive and the undervalued rupee will support the economy.

Corporate earnings are likely to stabilise/improve as businesses shift focus
from growth to profitability. In a slow growth environment, businesses undertake cost rationalisation (through deleveraging, cutting SG&A and employee costs etc). This will help stabilise/expand PBT margins even as sales continue to slow. History offers ample evidence of the same.

Accordingly, while there will be some further downgrades in FY13 Sensex earnings of Rs 1,280, as per our bear case estimate we do not foresee earnings falling below Rs 1,220. Hence, assuming a below-average multiple of 13 times, Sensex downside is protected at 16,000.

Given the weak macro-economic fundamentals, we favour a bottom-up approach. For next
couple of quarters, we play the interest rate cycle theme, moving real estate to overweight, and retaining overweight on autos. Further, given demanding valuations of consumer sector, we are downgrading it to equal weight from over weight.

Meanwhile, telecom is upgraded to over weight, while IT continues to be over weight.