Credit Suisse has identified 10 ôunderappreciatedö themes in India with large investment implications among shareholders, investors, corporates and policymakers in the first half of 2009.

Depending on corporate events in the first half and, more importantly, on the mid-year election outcome, the market could either rise 30% to 40% or fall sharply in the second half, Credit Suisse says, adding it doesnÆt see any point in forecasting the direction of this crucial inflexion now. The Bombay Stock Exchange Sensitive Index (Sensex) closed at 10,275.60 points yesterday.

Bottom-up, value-driven investment in quality management companies is the best strategy û more important than sector allocation û for now, the firm says.

Credit Suisse elaborates on the 10 themes:

Unprecedented policy easing. The first half should see inflation and interest rates at levels almost never seen in Indian history. It would be wrong to assume that fiscal and monetary policy easing are likely to stop anytime soon. Policy easing and valuations are the main reasons why we do not think the Sensex will fall much below 9,000 without unforeseen political or corporate upheaval.

Growth uncertainties. Despite significant improvement in many other economic data, continuingly lacklustre growth prospects will bother investors the most. Weak growth and political uncertainties are likely to ensure that the Sensex does not rise much above the current levels sustainably until elections in the middle of the year.

Loss recognition. Corporate IndiaÆs consolidation should have three major steps. In the first stage, an increasing number of companies should come out and declare losses û most will be branded as ôone-offsö or extraordinary û because of the asset market falls of 2008 and due to the ongoing economic slowdown.

Loss allocation. In the second step, the losses should undergo innovative and often conflict-causing processes as they are marked to somebody or the otherÆs net worth. Investors may see many new ways in which they are reported or hidden in profit and loss. Regulators could play an important role in abetting or cleansing this process. Given the political environment, it is likely that regulators may facilitate the process in favour of majority rather than minority investors or creditors in the first half. Headline-grabbing events, however, will be the conflicts between majority and minority shareholders, group companies and creditors. Investors should invest in quality companies to reduce risks from this.

Recapitalisation. Many companies from distressed sectors like real estate, construction and mid-cap segments would need to raise equities even at depressed prices before their operations could stabilise. Avoid the companies facing dilution prospects despite significant falls in their share prices.

Bank non-performing loans (NPLs). Few emerging market slowdowns have been traversed without banks undergoing any decline in asset quality or profitability. Despite the policy easing and an increasing level of regulatory forbearance, banks remain at risk given the extent of losses that have been created. Underweight banks in the Indian portfolio.

Major shareholder consolidation. We expect conservative Indian business groups to restructure to return to the positive cash flow ways by focussing on core competencies and postponing expansion plans in unrelated areas. Investors should overweight flagship companies of key business groups and underweight the peripherals.

Minor shareholder consolidation. Investors of all kind are expected to turn more focused on liquid investments as risks become more evident in relatively illiquid real estate, mid/small cap companies and non-orthodox investment vehicles. New trends, including withdrawals, could be seen among local investors.

Regulator consolidation. We expect rules to change continuously not only for investors and corporates on disclosures as losses turn more painful but also for industries, banks and businesses as regulators come under pressure to prevent a repeat of some of the abuses that have taken place in the last few years.

Political events: In the end, we expect the market to be most influenced by elections, results and subsequently the policy framework adopted by the new government in mid-2009. With a strong government and reform-oriented policies, the future government could help foster an environment where investors look beyond the remaining pains of the ongoing slowdown and re-focus on long-term fundamentals. Alternatively, a weak government or wrong policies could be slammed hard by investors in a fragile environment. As we see the new year at the outset, despite all historic economic announcements and likely substantial corporate developments, nothing may matter more than politics.