Asia strategist Ajay Kapur expects 30 to 40 per cent upside in Asian equity markets next year "as they shift from a liquidity-driven phase to one based on strong earnings growth." In his brief report as part of MSDW's global strategy bulletin dated November 1, Kapur has listed India along with Hong Kong, Singapore and Korea as favourite markets. He sees India as a "fashionable consensus favourite." Kapur's views suggest a strategic shift in approach to emerging markets of Asia which will see investments driven by earnings growth. This is significant for India as well, which has witnessed large inflow of FII funds into equities driven mainly by liquidity.

Between April and July, India benefited from the funds flowing into Asian markets as part of the overall strategy of foriegn investors.During these four months, India attracted nearly Rs 4,365 crore in investments from FIIs. Foreign investors essentially started re-rating a large number of cyclical stocks with the play focussed on economic revival.

The FII investment theme in the new year will obviously be based on growth in earnings of Indian companies, shifting away from the re-rating game. On the flip side, a number of stocks will be put to litmus test as a fresh assessment of earnings potential is made. Investment inflows will, therefore, be stock specific depending on a company's ability to demonstrate earnings growth.

Since the beginning of April, the Indian equities have risen on an average by about 40 per cent to 50 per cent, based on the Sensex. With this kind of appreciation, investments are likely to shift to stronger candidates in specific industries.