Asian Regional Strategist at JP Morgan, Adrian Mowat says that fair value target for the Sensex is 11000 level. While he is optimistic on the earnings growth in India, he is cautious on valuations.

He adds that GDP upgrades and earnings growth have justified new highs. He believes that India is the most expensive market in Asia, and that global EM managers are underweight on India, Taiwan, Russia and China.

Further he sees lower amount of funds flowing into EMs over next 12 months. He feels that the US Fed may hike rates again by March 2007. By June 2007, US Fed funds rate are seen at 6%, says Mowat.

Excerpts from CNBC-TV18's exclusive interview with Adrain Mowat:

Q: You have been very circumspect about India. Are you surprised that it continues to flare up and hit all-time highs?

A: The GDP upgrade numbers as well as the strong earning numbers are justifying the market moving higher. We are in the fourth year of decent global economic growth. The level of earnings growth that you are seeing around capital markets is slowing, but it is still a good pace. Investors are paying up for where they are seeing consistently high growth and at market level, that’s what you are seeing in India.

Everyone celebrating the 13,000 on the Sensex amuses me. Our fair value target is 11,000. We were actually distinguishing ourselves earlier in the year by staying very positive on this market and saying it was going to achieve premium valuation.

But now our message is you have achieved premium valuation, you should be celebrating the fact that this is the world’s most expensive stock market. We look at this on the MSCI definition and India is trading on a forward multiple of 18.6 times, put that in perspective with Japan's 18.1. And Japan used to be the most expensive market.

Now I think there are good reasons why this market should have a valuation at this level, but having a high valuation means you are pricing in on a lot of good news. That generates a skew in the risk-reward profile.

If India continues to generate high economic growth and profit growth, then the PE multiple will stay at this level. And you should track with that high level of earnings growth.

The problem is two-fold if you disappoint on the earning numbers; your PE will come down very quickly but, the other thing that could happen in a country with a current account deficit is that the ability to attract capital will diminish as people see less growth.