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Speaking to CNBC-TV18, Michael Preiss, Associate Director, Investment Advisory Group, HSBC predicted that the volatility in EMs may increase in 2008. Equities would still be the preferred asset class in 2008, he added. India may be ranged and may drift down to 19,000 levels, Preiss said.

The dollar revival may hurt liquidity flows into India, he added. He expects more moderate flows coming into India in the coming months. Preiss prefers domestic consumption and infra stories in India.

The dollar could recover 9-10% versus the euro and 15% versus the pound, he said. It may recover to 42-43 levels versus rupee, Preiss added.

Excerpts from CNBC-TV18's exclusive interview with Michael Preiss:

Q: What is your expectation of what 2008 might be like for emerging markets in light of what is happening in the US economy?

A: There are two things. I think there will be increasingly a lot of volatility going into 2008, especially because of the two forces that are basically battling out at the moment. One is that we have very strong economic fundamentals around the world, but we have very weak financial markets in the sense that we have this whole overhang of the banking system in the US and hence that has spread. So, we have got this good global economic growth on the one hand, and a weak banking sector on the other and that is exactly the question - which one will come out on top of this. But I think the growth argument is winning; net-net for 2008, equities still would be a good asset class to be in.

Q: What about India and the kind of gains that we have posted in 2007? How sanguine are you about this market in 2008?

A: I think it will hold up. I think it will trade down to sideways to down to rangebound basically. In the short-term, perhaps we could easily see a move back to the 19,000 levels or a 7% retracement is easily on the cards. But I think over the year, most probably, the Indian equity market will put in a very good performance because here again, when people think about India, it is a domestic growth story, and again the growth story in India is exactly what people as long-term investors would want to be invested in.

Q: The months of January and February are normally months where one sees a lot of foreign flows into India. What are you estimating this time? Do you think the US problems could keep the liquidity flows from repeating the kind of performance one saw in the previous years or do you think those flows will continue?

A: That is a good question, because when we think about it, it has to do with the dollar. A lot of the banks, including ourselves, HSBC, now feel that the dollar will recover in 2008, especially against emerging market currencies. When you look at Wall Street, a lot of economists and strategists now feel that the dollar is recovering especially against the high yielding currencies - the South African Rand, Turkish Lira, Mauritius Rupee and all those. So, if that is the case, then there is less incentive for foreigners to put money into India because the currency most probably also will depreciate in line with that.

On the other hand, the underlying stock market is still very strong. Hence, net-net, I think the equity market side will basically win out. So, I do expect inflows, but I expect them to be declining - I mean basically less inflows over the next couple of months.

Q: In that case, if you are not expecting too much of a dollar decline, any specific sectors you like in India? Would you say that you will start looking at an IT sector for instance?

A: IT, yes. But IT I think is the most obvious choice for foreigners also - IT in India. The real story I think is on the domestic consumption side, and also infrastructure for those reasons. Those two areas are where anybody with long-term investment wants to be invested in, and more importantly cannot afford not to be invested in.

Q: You talked about a recovery in the dollar. What is your estimate of how much recovery it can see from the kind of lows it made in 2007?

A: Well that is literally a trillion-dollar question, and here opinion is always very divided. But the official houseview is that the dollar could easily recover - around 9-10% against the euro and even 15% against the British Pound.

Against the Indian Rupee, most probably we could see perhaps a pullback back to the 42-43 levels.

Q: Is that your 2008-end target on the dollar-rupee?

A: Most probably yes, around that sort of level, yes. A little bit of a pullback; most probably not above 40.

Source: Moneycontrol.com