India, China and other Asian countries are leading the world out of the global economic crisis. This is what members of the Asia-Pacific Economic Cooperation (APEC) forum believe. The APEC consists of 21 member nations from the Asia-Pacific region, representing around 54% of the global economy. In a conference that ended late last weekend, the member nations vouched to maintain their respective stimulus until they see proper signs of economic recovery. As reported on Bloomberg, the consensus among the member nations was that while their policy responses have helped to set the stage for recovery, but the same (recovery) is not yet on a solid footing. In the words of the Chinese President Hu Jintao, "The profound impact of the international financial crisis still persists. The foundation is not yet solid for the world economic upturn. India is not part of the APEC. But even our policymakers have recently hinted at continuing the stimulus till sustainable signs of recovery emerge. For instance, Prime Minister Dr. Manmohan Singh had recently hinted that his government won’t withdraw the stimulus packages before the next year. "As a medium term objective, India will work to achieve a high growth rate of 9% per annum on the back of a strong domestic demand created by a large investment in infrastructure sector," he was quoted as saying recently at the India Economic Summit. We believe that the government’s stimulus spending and other emergency measures (like those from the RBI) have helped set the stage for an early recovery of the Indian economy. However the next stage of growth will be dependent on the real improvement in consumer and export demand - the latter especially for sectors like software, textiles, and small scale industries. Caution remains the buzzword across industries, at least if we were to go by our interactions with managements of several companies after the recently concluded September quarter results. While IT companies are cautious towards client spending, banks are not yet raising victory flags for credit off-take. Manufacturing companies are not yet speeding up capacity utilisation, while most of them (like auto) clean up inventory built up over the past few quarters. In short, it is still a wait and watch scenario for the Indian economy and companies. Stockmarkets, however, continue to run up - Sensex is up around 6% since end of October, and 75% since the start of this year. So, it is time to practices caution? Yes, we believe. See for instance the average valuations of Indian large cap stocks, which have moved from a low of 12 times earnings in March to the current levels of around 21 times trailing 12-months earnings. It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ’slowdown earnings’. They are also making the case of a much improved corporate performance in the next few quarters. But this seems a bit fanciful as of now. While the last two quarters’ performance has been driven by operational leverage in the form lower raw material and interest cost, we do not see this sustaining going forward. Ultimately companies have to grow sales to grow their profits that seem tougher to achieve in the current environment. At least until we see signs of sustainable economic recovery. Remember, the current recovery that we are seeing is like a patient recuperating on steroids. If he isn’t able to sustain himself without these, he might crash yet again!

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