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Agony and ecstasy
Shankar Sharma, vice chairman & MD
First Global Stock Broking
I see the market being weak in the first half of the year. In the second half, there may be a mild-recovery, but I don’t see markets in India scaling a new high in 2010. High inflation will be the dominant theme in 2010, driven by very strong agri-commodity prices. This will change the situation that prevailed in 2009 — i.e., low rates and low inflation.
Big bull India
Christian Dargnat, CIO, BNP Paribas Investment
Frédéric Surry, Head of investment strategy
William De Vijlder, CIO, Fortis Investments
We are optimistic about the Indian market in 2010 for a number of reasons. Like China, India benefits from a very high savings rate – close to 30 per cent of GDP – while the level of credit outstanding is 55 per cent of GDP – still one of the lowest in Asia. As the recovery proceeds, private consumption and credit growth should accelerate, supported by favourable demographic conditions and extremely low market penetration in many consumer sectors, such as motor vehicles, white goods and services.
The Indian market is benefiting from a growing domestic investor base: well-developed insurance companies are offering unit-linked products, which are boosting retail investor participation, and the mutual fund industry is booming. Meanwhile, there has been $14 billion of investment in 2009 by foreign institutional investors.
A well-diversified investor base should make the market less volatile. Though India suffered the worst monsoon in decades this year, there has not been too much distress in most states, showing the efficiency of government policies that are boosting rural consumption.
However, there are risks in the horizon. Inflationary pressure is mounting due to base effects and rising food prices – such that India is likely to become one of the first emerging countries to start tightening monetary policy. Meanwhile, the central budget deficit is above 10 per cent, which will require much greater discretion in public spending. A more regressive fiscal policy and a hawkish monetary attitude could put pressure on the markets.
Stock picker’s day out
Sandip Sabharwal, CEO, Portfolio Management Services, Prabhudas Lilladher
Indian market is well positioned for a strong upward move over the next few years. Although 2010 may not see the kind of strong bounce seen in the present year, it should still be a good year for the market. Easy liquidity conditions and weakening of the dollar will continue to bring inflows into India. The worst and best case scenario for the Sensex in one year hence will be around 14,000 (at 12x P/E) and 22,000 (at 20x P/E), respectively. I believe there are strong investment opportunities today in investing in a stock-specific manner. The overall investment thesis for 2010 should be that it will be a stock-picker’s market and specific ideas will be able to outperform the market significantly. Unlike the present year, where the market itself is up by over 80 per cent, the next year will be of relatively subdued returns — thus offering opportunities for making money through alpha investing.
Looks like bear’s year
Darshan Desai, Co-founder and managing partner, Euromax Capital
The number of bulls is on the rise, but my overall sentiment towards equities remains negative. Investors should remain sceptical of the current rally, as well as the longer-term prospects for stock markets, including India. However, if the near-term outlook calls for caution, the long-term prospects for India are good. India’s economy is likely to hit a growth sweet spot, driven by high savings rates, attractive demographics and rising industrialisation. GDP should grow at 8 per cent to 9 per cent a year for an extended period. The need for significant improvement in power and transport infrastructure translates into plenty of investment opportunities. The biggest risk for the market indices in 2010 is the real possibility of FII investment pullbacks. I am most worried about a reversal or unrevealing of the ‘dollar carry trade’, which will suddenly descend upon us if the dollar rallies on a sustained basis. The other significant risk is the state of India’s balance sheet, which has high public debt and a large budget deficit by emerging market standards, while the economy has seen rapid loan growth in recent years. If there is one area where India could stumble, it is probably this.
Partly cloudy sky
Ridham Desai, Morgan Stanley India
Sheela Rathi
Notwithstanding India’s outperformance driven by improving growth at home and a favourable political environment, the bulk of India’s 110 per cent return since March 2009 is explained by a move in global equities. The key debate is whether the tight correlations between Indian equity returns and the rest of the world could break down in 2010 and whether this could lead to a significant correction in Indian equities.
Our view is that correlations could break down, but this does not mean that Indian equities will underperform. The correlation of returns between Indian equities and the rest of the world is just off all-time highs, comparable to levels at the end of the bull market in early 2008 and during the financial crisis in the second half of 2008. The first scenario under which correlations may cease will be if India surprises negatively on growth.
The market is now pricing in a V-shaped recovery in industrial growth and, hence, its ability to absorb a negative growth surprise is quite limited. The market’s valuations do not appear attractive at present levels, but they do not look too stretched either. On our estimates, the Sensex is trading at 16x and 13x FY2010 and FY2011 earnings, respectively.
At a 10-year bond yield of 7.4 per cent, investors are realising a risk premium of 6.4 per cent, which suggests that the market is attractive for long-term returns. In the second scenario, correlations may not any longer because of events outside India. A third scenario will be if India surprises positively on growth.
Beware of external forces
Raamdeo Agrawal, Director & co-founder,
Motilal Oswal Financial Services
There are counter forces at work. On one hand, demand from institutional investors for Indian equities is very strong. Profits of companies are also going to be strong. But, a lot of papers are expected to come in 2010. Till all the papers are absorbed, the market is likely to remain in this fairly valued zone. We also need to see how will the global markets react once the stimulus given by major economies are withdrawn. That will also impact
our markets.
Sensex @ 20,000
Suresh A Mahadevan, Analyst, UBS
We believe the market will continue to gain in 2010 due to 1) strong economic growth outlook (GDP growth estimated at 9 per cent for FY11); 2) strong outlook for earnings growth (forecast to grow 21 per cent in FY11); and 3) positive data points (on GDP, earnings growth) that are likely to attract institutional inflows. The key themes for 2010 will be 1) A pickup in infrastructure spending (companies such as L&T, Nagarjuna, Lanco to gain); 2) continued momentum in consumer spending (good for companies suck as Maruti, IndiaBulls Realty); 3) the banking sector will benefit from higher credit growth and a slowdown in NPA accretion; 4) capital raising to kickstart the capex cycle, driving demand for intermediate goods (Ambuja) and services (L&T, Tata Power); and 5) reforms in banking and insurance (Union Bank, ABNL). We believe upside surprises are likely if the government delivers on reforms. Downside risks could come from a significant rise in global commodity prices or if the government fails to deliver on expected reforms. Our March 2011 target for the Sensex is 20,000.
Heading into bubble zone
Saurabh Mukherjea, head - Indian equities, Noble Group
Whilst the Indian market appears fully valued going into 2010, the return to 7 per cent to 8 per cent GDP growth, super loose fiscal and monetary policy in the US and an upturn in the companies investment cycle in India makes it very likely that the stock market will venture further into bubble territory in 2010.
From a macro-economic perspective, 2010 looks more like 1999 (Sensex up 64 per cent) or 2007 (Sensex up 47 per cent) than 2000 (Sensex down 21 per cent) or 2008 (Sensex down 52 per cent).
Investment by Indian companies is likely to make a comeback halfway through 2010. That will not only boost GDP growth, it will also push up earnings in FY11 and FY12, thereby, boost share prices. US monetary and fiscal policies will continue to stay loose. As a result, the VIX should stay low and, hence, portfolio flows will head to emerging markets.
Risks in 2010: There are three key risks arising out of the emerging global situation that investors need to navigate. First, the incidents surrounding Dubai World sent jitters across investment world. Several European countries and even the UK face the prospects of a sovereign rating downgrade in 2010. Secondly, increasingly shrill voices are now raising concerns about China facing a hard landing. Third, around the world (and particularly in India and China), cost-push inflation looms large over the incipient global recovery.
Lots of action, little movement
Toral Munshi, Head of India equity research, Credit Suisse
The year 2010 is expected to be a positive for Indian equities, though the move will not be as linear as in 2009. Q1 expected to be choppy as exit of fiscal and monetary stimulus and concerns over global asset bubbles will weigh on investor sentiment.
We expect 2010 to be a year of execution, which will see the implementation of some key long-awaited reforms by the government. Our best-case scenario for the Sensex in December 2010 is 19,000. Sustained earnings acceleration can take the market to an optimistic scenario of 22,000.
Over to the FIIs
CJ George, MD and CEO, Geojit BNP Paribas Financial Services
Global capital flows into India are expected to continue, probably in a much stronger way. It is because there is a realisation that India is the best investment destination since our economy has shown resilience to the global recession.
If we come out of the ongoing drought without much problem and succeed in clocking an impressive, say nine per cent, growth in gross domestic product, the attraction to India will grow stronger. If that happens, the market can go up significantly.
(Compiled by Mehul Shah, Vyas Mohan and Rajesh Abraham)
*From notes to clients
 Limited.JPG)
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