"We go into 2008 with economic data still robust, the government plan of infrastructure spending of about $400 billion on track, but on the backdrop of developments in the international markets and high valuations, we expect the Indian market to see high volatility," Fidelity International India fund manager Sandeep Kothari said.
Given the increased level of uncertainty, diversification would be essential and investors should identify companies with strong cash flow and solid balance sheets, the firm said in its outlook for 2008.
"In our view, the corporate earnings outlook continues to be reasonable," Kothari said. The view is in contrast to the market expectations that earnings growth for FY09 may slowdown to about 16 per cent as compared to 18 per cent for financial year 2008.
Supported by growth outlook of firms' earnings and a positive macro environment, Fidelity said that stock 'valuation are not in bubble territory,' although they are at the higher end of the trading range.
Regarding the outlook for the fixed income market, it said that the moderating credit growth in the country and possibility of further rate cut in the US have improved the sentiments in this segment.
A rate cut could be on cards next year if inflation remains within the limit prescribed by RBI (five per cent) despite rising oil prices, Fidelity added.
The buoyant mood in the Asian market would continue in 2008, driven by continuing economic growth, but global markets would face some hurdles because of the tightening of credit conditions. Asia's importance in the global economic scenario is expected to rise significantly, Fidelity said.
Besides, share price in Asia have risen sharply in some markets such as China and the continued growth there would be reflected more in equity markets.
On the outlook for global equity markets, Fidelity International head of Investment Strategy Michael Gorden said: "Next year could be one of the most interesting for equity
markets this decade. Investors would be able to make gains provided they are careful about their stock selection and are willing not to be led by the main stock indices".
At least, two of the three reasons that encouraged the bulls of the West since March 2003 -- leverage, consumer spending and corporate earnings -- could be missing in 2008, Gorden added.