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THE Head of Research at UBS, Mr Sandeep Bhatia, sees the Sensex at 8,700 levels by the end of 2006.

He adds that long-term investors are likely to remain invested in India, but valuations are a cause for concern in the short-term.

Further, he says that investment interest is seen from Europe and Japan.

Strong interest is seen in pharma, engineering and consumer goods. Mr Bhatia also says that earnings growth is seen at 26 per cent for FY06 and 17 per cent for FY07.

Excerpts from CNBC-TV18's exclusive interview with Mr Bhatia:

On the importance of India in foreign investors' portfolio:

India is becoming extremely important for investors' portfolios, long-term investors find this a story which is very difficult to ignore and on the back of the investment forum we just had, I feel a lot of investors would continue to remain optimistic and invested in India.

On where large participants in Indian markets are from:

Close to 55-60 per cent of the investors are either very new to India or are still learning about India. So, clearly there is a lot of new participation and new investors. Europe and US were very well represented in the recent investment forum. We had investors from Japan and Asia, so it was across the board and investors from across the globe.

On the Indian markets:

In the near-term, the market's valuations are a cause for concern. However, any investor who has an over one-year perspective still finds India's earning growth story very compelling. Investors also find scope for strong growth across some key sectors. So besides some short-term concerns on valuations, the message that we got from investors was the fact that the India story is extremely compelling.

On sectors that are most compelling at this point:

Our investment forum had a cross section of companies from the telecom, pharmaceutical, engineering, metals, banking, energy and consumer goods sector. So across the board we had representation from all these sectors.

Also, the high growth sectors in this country, that is IT and telecom, delivered strong absolute earnings growth. The IT sector is benefiting from the weakness in the rupee but there was a strong interest in the pull back which is taking place in the consumer goods, pharma and engineering sectors.

On whether most people are bullish on emerging markets:

The first quarter will be critical, since we need to see how US interest rates move and what impact that has on the performance of emerging markets. So there are concerns on India's interest rates moving up on the back of strong demand growth and loan growth that we are seeing in the country.

So, apart from the near-term concerns, the Indian market seems to be the strongest story within the emerging market universe. The fact that most companies, which had delivered results over the last couple of quarters, have continued to deliver earnings growth in-line with expectations makes the scenario strong.

We see an earnings growth of 26 per cent for the current year and 17 per cent for FY07. So that is one of the highest growth stories within the emerging market universe.

On reforms:

Investors are definitely expecting much more on that front, but it is corporate India's growth story, which is driving this market.

Positive forward momentum on that, in the next 6-12 months would definitely be icing on the cake.

On the Sensex target:

Our target for the Sensex by 2006-end is the 8,700 level, so that does not leave the market with any immediate short-term appreciation.

We have been worried about oil and energy prices and the impact of that, but if someone has a more than one-year time frame in mind, the market is still looking compelling. Our investors would be taking any correction in the market as a positive signal to invest.

On currency:

Interest rates and currency are inter-related, so while there was no specific discussion on a separate panel, we did have two separate panels which discussed energy and IT sector, but both in the banking sector and IT sector, the currency and its impact with interest rates did come across.

On the whole, the view was that India has some sectors like IT, which benefit from this, and of course the metal sector to an extent, would benefit with the Indian rupee weakening.

So, to that extent there were still some sectors that benefited in the country.

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