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2010: Year of Discerning Investor
If 2008 was a shocker and 2009 a roller coaster, 2010 promises to be a bumpy ride along a country road. The new year has opened on a positive note.
- PUBLISHED: Mon 4 Jan 2010, 11:58 PM UPDATED: Mon 6 Apr 2015, 10:23 AM
- By:
- Virendra Parekh (India Monitor)
There is cautious optimism in the air, in contrast with nervousness and trepidation a year ago. Both the economy and the equity markets are in a better shape than anyone had expected.
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Major indicators are showing signs of early improvement: GDP growth 7.9 per cent, industrial production in double digits, buoyant tax collections, exports on the rise after falling for 13 months and FIIs pouring in $17.3 billion in the Indian equities in 2009. The BSE Sensex has given return of over 80 per cent in 2009, smaller than only Sri Lanka, Indonesia and Brazil.
Investors would certainly like a repeat performance by the Sensex in the new year, especially in view of the sound economic growth. But how likely is it?
Not much, to be frank. A year ago, stock valuations were down, interest rates were low and central banks including RBI were willing to shell out liquidity. All this has changed now.
The BSE Sensex now trades at 16 times its estimated 12-month forward earnings wherein most of the positives, including improving economic fundamentals and corporate earnings, seem to be priced in.
So far, the Sensex has surged through an expansion of P/E ratios. Now it is the turn of corporate earnings to catch up and make a case for the valuations to sustain at higher levels. If earnings fail to measure up to market expectations, that could be the reality check needed to snap the current rally.
The economy certainly has a lot going for it. But there are areas of concern, even from the stock market’s point of view.
Food prices have gone through the roof and the Reserve Bank of India is (wrongly) under pressure to tighten liquidity and hike interest rates to curb inflationary expectations, while the forthcoming budget may (rightly) contain some roll back of the fiscal stimulus. The industry and the stock market may not take kindly to it.
We could see a sharp counter-trend rally in the dollar, which could reverse some of the dollar carry-trade (investors take cheap dollar loans to invest other high-yielding assets) and pose additional risk. Quite a few governments are working on a roadmap for withdrawal of stimulus packages, which would test the true durability of the recovery in the global economy. Indian economy and Indian markets will certainly be impacted by such a development. Finally, the gradual restoration of investor confidence in the global financial system has received a fresh jolt from episodes like Greece.
The market sentiment in the Indian markets will be shaped largely by two related variables: the pace of economic reforms and FII inflows. For FII inflows to retain their current momentum, the government will have to convince the global investor fraternity of its commitment to economic reform and fiscal consolidation.
The market sentiment is distinctly positive at present. However, since a lot of the good news is already priced in, the return expectations from the broader market are moderate.
To get superior returns in 2010, investors will have to be selective and figure out the favourably-placed stocks and sectors because many companies are still surrounded by concerns (like excessive debt, low demand, etc.) and yet to show clear signs of revival in their earnings.
Investors with medium-term outlook could look for frontline companies in sectors such as power, construction, engineering, IT, hospitality, pharmaceuticals and PSUs up for stake sale.