Specifically, looking at India today there are currently more negatives than positives in the near term - An uncertain and drawn out political environment, high inflation (weekly wholesale price index over 12 percent year-on-year on Sept 5), a widening trade deficit and a depreciating rupee.

Asia's "darling" over the past five years is today feeling the pain of global de-leveraging as foreign investors slash their exposure in line with their risk appetite.

In addition, India's political situation remains fluid, though having won the vote of confidence the government's position has strengthened. Prime Minister Manmohan Singh gave his personal support to the Samajwadi Party to ensure the survival of his minority coalition government after the Left pulled out. Given the economic slowdown, we believe an early election call is unlikely. Investors should therefore focus mainly on the Reserve Bank of India (RBI) and how India's central bank handles the cyclical headwinds.

On the plus side though, India Inc delivered good earnings in the June quarter (up by 22 percent year-on-year). Equities are now less expensive than earlier this year at around 15-16 times 12-month forward earnings.

In a worst case scenario, we believe India can still achieve a gross domestic product (GDP) growth of 6-7 percent over the next couple of years, with a earnings per share (EPS) growth at around 12-15 percent. Our India team expects the RBI to raise interest rates to contain inflation while still allowing a solid growth in GDP.

Given the accelerating global macro pressures, the near-term outlook for South Asia still looks murky, however, as a consequence of numerous domestic concerns coupled with the "perfect storm" that is battering the world economy.

High and rising energy costs are compounding a slowdown in the G7 economies which had already been severely bruised by the subprime fallout - a crisis that will soon claim the prize of being the largest collapse in the financial market history.

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 spike in crude oil price. Thus the Bombay Stock Exchange (BSE) should enjoy an above-average rebound on any sustained correction in oil below $100 per barrel.

The BSE's Sensitive Index has declined by 29 percent this year (year to date Sept 5) on the above concerns and pressures, with the key hot topic being inflation (driven by food and oil at $145 a barrel) and higher borrowing costs which hurt growth.

Going forward, 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 further consolidation or correction in oil before we see markets like India, whose economy is highly dependent on imported oil, regain traction.

The author is head of investor communications, JF Asset Management.

(HK Edition 09/12/2008 page3)