To my mind, European situation is not that precarious as it was in the US during the Lehman crisis. I know that there would be many economists who would vehemently disagree with this but I think US. Relevance of EU to world GDP growth, cross country trade and as a reserve currency is far lesser than that of the US. When there was question mark over US economic growth, the world panicked. However, the same situation may not happen when some European countries (PIIGS) default.

There could be a possible scenarios coming out of this. The trillion dollar rescue package for PIIGS comes with certain conditions to improve the fiscal situation. These countries will have to raise taxes, cut expenditure and go for a prolonged period of fiscal consolidation. If that were to happen, world might see low growth, benign interest rates and subdued commodity prices for a long time. This can also lead to reiteration of importance of the US. Capital is expected to flow back to enabling US treasuries and dollar to appreciate. Improved capital flows will lead to better reserve situation and stronger currency. Till some time back, there was apprehension as to how US will fund its growing fiscal deficit as the ability of the rest of the world to buy US treasuries was falling. That situation has suddenly got completely reversed.

For the world equity markets, one form of leverage might get replaced by another form. The dollar carry trade shall get replaced by Pound and Euro carry trade. In between, huge volatility is expected in the market.

The implication for India are that subdued commodity prices might result in earnings downgrade of some large cap index companies. However, as US becomes stronger and the contagion effect of EU is restricted, India might emerge as the favoured destination

In these circumstances, the following sectors could be winners ;

Financial Sector: Lower commodity prices, higher tax collections, PSU divestments and increased revenue from telecom industry shall result in lower than estimated fiscal deficit situation. Owing to low interest rates in most parts of the world, RBI too is expected to keep interest rates stable. These shall result in ample liquidity and stable interest rates in the domestic economy. Banks would therefore stand to gain from high credit growth and stable margin. The bond yields remaining low would add to treasury income. As domestic economy continues to grow, financial companies would emerge as the best play on India’s domestic consumption theme.Big banks like SBI or small banks like Dena Bank should outperperform

Auto: Market is cautious on the operating margin for auto sector this year. If commodity prices were to correct and stay subdued, auto companies may see earnings upgrades due to better than estimated margin assumption. Secondly, a normal monsoon, stable interest rates and liquidity in the banking system shall be beneficial for overall volume growth in tractors, two wheelers and passenger cars. We may therefore see earnings upgrades in auto sector and the sector shall out-perform.

Maruti should outperform the market. The margins can come under some sort of pressure as euro and pound sees some depreciation but higher volumes should keep profitability high

Cement: Twin concerns of Supply augmentation and drop in realizations is already factored in prices. What is positive for the industry is the higher demand. Cement demand in India has moved up from 8%-9% range to 11%-13% range. I expect demand to further accelerate due to increase infrastructure spending and private consumption on housing. Barring the monsoon period weakness, I don’t expect prices to correct further. My view is that cement companies will continue to make 25% EBITDA margin due to strong demand and drop in coking coal prices. At 12% demand growth, cement industry needs 60 mn tons of additional capacity by FY12. So, in our view the increased supply will be absorbed by the market without significant drop in realization. Cement has strong linkage with the domestic growth, valuation is reasonable and current sentiment is negative.

Shree cement can be big winner in these circumstances as apart from cement - in one years time additional 300MW of power capacity will come on stream and this would be on a merchant basis. Incremental EBIDTA could be as high as the current EBIDTA of the company (assuming a EBIDTA margin of Rs 3 per unit). It is one of the most profitable cement companies in India and available at very attractive valuations