We are not sufficiently enthused by valuations (fair to rich for most stocks), macro-economic conditions (still wobbly globally and domestically) and governance in India to revise our cautious stance on the Indian market notwithstanding recent attempts by global central banks to stabilize and improve global economic conditions. We struggle to find good investment ideas without taking a very expansive view of the world and ignoring valuations completely.

High global liquidity will not address macro challenges of solvency and growth. We note that recent announcements of unconventional monetary interventions by the ECB and the US Fed will help to stabilise global macro-economic conditions, at best.

However, most economies will likely go through a slow recovery process given the structural challenges in several countries in Europe, deleveraging in most large economies, forced by austerity programs and market compulsions and political uncertainty.

India faces domestic challenges; political situation not conducive to meaningful reforms or growth. It is possible that the market, in its state of collective amnesia about weak fundamentals, may gloss over domestic problems of weak macro-economic conditions, faltering growth and dysfunctional politics, given strong global liquidity and an ongoing ‘risk-on’ rally.

The recent announcement of a fuel-price increase is a positive but will still result in very high subsidies, fiscal deficit and inflation. It will provide some lever to the RBI to reduce policy rates during 2HFY13; we already assume a 50 bps cut though.

However, we believe cynical politics and a busy election schedule up to the general elections in May 2014 will preclude meaningful reforms that can push domestic growth to 7-8% on a sustained basis.

Liquidity has short-term charms and a tendency to drown a rational investment approach. We note that India has received over US$42 bn of net FII flows from January 2010 and yet the market has returned a paltry 3% over this period (-13% in US Dollar terms).

Thus, we would focus more on fundamentals and valuations rather than get carried by liquidity. Liquidity by itself cannot sustain markets forever unless it is backed by strong real economic growth and corporate earnings.

We expect global markets to take a more sober investment view once the rush of the recent actions of central banks is over and investors start focusing on earnings and valuations. The Indian market looks quite expensive in the context of very modest earnings growth over the next two years.

Short on ideas and we don’t want to be reluctant investors. We have cut weights on consumer stocks and made the sector underweight finally noting the stratospheric valuations of most stocks in the sector.

Likely continued weak domestic economic situation, poor financials of most infrastructure companies, little faith in global economic recovery and continued credit quality issues in the banking sector eliminate domestic cyclical stocks, infrastructure names, global commodity and most banks from our model portfolio. We have added a few beaten-down names in the industrial space; their valuations do not factor in any recovery.