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Indian stock markets likely to remain buoyant in 2011


The robust economic growth and record inflows from foreign institutional investors were responsible for the rally in Indian stock markets during the calendar year 2010. The Bombay Stock Exchange benchmark index ‘Sensex' gained 3044.28 points to end the year at 20509.09. Though the index moved up by 17.4 per cent during 2010, it is felt that this is far below expectations that one could have anticipated.

However, in terms of absolute performance it compares quite favourably with Brazil, Russia, India, China (BRIC) nations. With the exception of Russia, which went up by 23 per cent, Indian markets outperformed Brazil which was up by 1 per cent and China which was down by 14 per cent. China witnessed lot of speculative money chasing Chinese stocks started exiting when the country began monetary tightening. The first such occasion was in the early part of 2010. In the last two months, China had raised its rates twice.

Best performing indices

The behaviour of Indian markets was primarily driven by domestic consumption-based opportunities. Therefore, the best performing indices were automobile, which was up 33 per cent and fast moving consumer goods (FMCG) which was up 27 per cent. Healthcare, banking and information technology were other three notable sectoral performers.

“We are entering 2011 with lot of scepticism in our hearts. The pessimism on the local front is coming from politics and the global front is from economics. If we look at historical precedents — in May 2004 when the United Progressive Alliance (UPA) came to power and in May 2006 when commodity prices crashed — scepticism has normally been the formation for a rally in the markets,” said Sanjay Sinha, Chief Executive Officer, L&T Mutual Fund.

There is a consensus estimate that the earnings in financial year 2012 will grow between 18 per cent and 22 per cent. However, a major event or a radical shift in commodity prices or exchange rate can derail this growth expectation. Therefore, according to Mr. Sinha, as long as earnings growth is not at risk and the sentiment is pessimistic one can expect more structural rally to build in the Indian markets.

Currently the market is trading broadly in fair range of valuations. “At Sensex level of about 20000, the market is discounting financial year 2012 consensus estimates by about 16 times,” said Harsha Upadhyaya, Fund Manager, UTI Asset Management Company.

These valuations can be sustained if the earnings estimates going forward do not disappoint.

It is likely that the market will move up in line with corporate earnings growth (estimated at 18-20 per cent annually over the next two years) in the medium- to long-term. However, Mr. Upadhyaya said the short-term market movements were driven more by liquidity and sentiment, and “hence difficult to predict.”

While domestic inflation and hardening of interest rates and uncertain global economic backdrop are key downside risks to the market, the upside may come from re-rating of Indian equities due to sharp increase in foreign flows as India continues to be one of the high growth regions in the world.

Stock-specific approach

At current market levels, “we do not see any significant pockets or sectors of undervaluation.

“We may need to be more stock-specific in our approach as we step into 2011. As we see inflation as one of the likely risks going forward, we believe that the sectors insulated from inflation-related negatives may out-perform the broader market.”

Mid- and small-cap segments of the market usually move in spurts. The valuation gap relative to the large-cap segment was huge at the start of up-move and hence witnessed sharp rally in mid and small-cap stocks that outpaced large-cap stocks by a wide margin for about a year between mid-2009 and mid-2010.

After this rally, the valuation differential between the two segments has narrowed significantly and the absolute valuations of mid- and small-cap segments have also risen. The markets have already witnessed mid- and small-cap segments underperforming relatively against the large-cap segment by 10-15 per cent in the past six months or so. “From hereon, we believe one needs to be stock-specific even in mid- and small-cap segments as in the broader market,” Mr. Upadhyaya added.

In terms of sectors, consumer durables, pharmaceuticals, industrials, energy and financials are likely to do well, Mirae Asset Global Investment Group stated in a report on Market Outlook 2011. The FII stated that it continued to prefer consumption where trends remain healthy, led by rising incomes, favourable demographics and an easier financing environment.

It sees a shift beyond consumer staples to automobile, media, cable distribution, retailing, healthcare and airlines — all beneficiaries of higher income levels. Increasing rural consumption on the back of higher crop realisations, rising wages and wealth effects through higher land and gold prices, will provide a multi-year theme.

The introduction of a Direct Tax Code will provide further relief to the salaried class and boost consumption. It also prefers pharmaceuticals over consumer staples as the market for Western medicines still has low penetration rates, the domestic industry is estimated to be expanding in the high double-digits per annum, and a huge patent expiry of drugs in the developed markets remains an added demand trigger.

“We continue to like financials high RoEs (return on equity), low NPAs (non-performing assets) as a good proxy on the strong domestic economy, and IT as a beneficiary of strong offshoring trends by global companies to cut costs.” Industrials could be the dark horse of 2011 if the government gets its act together on infrastructure spending and the private sector embarks on capacity expansion after 18 months of strong demand.

“Though in the near-term, it may remain weak on European sovereign debt concerns, we believe any significant correction would be a good opportunity to increase exposure to a long-term growth story like India where demographics, entrepreneurship, free press and development-focussed governance will likely produce a golden period of returns for equity investors in the coming decades,” Mirae Asset Global Investment Group advised investors. However, it alerted that a significant rise in oil prices, a reversal of global liquidity and no up-tick in the investment cycle were the biggest risks to the India story.

Key factors

The key factors behind strong performance in 2010 were strong resilience of the domestic economy during the global financial meltdown, India's demographic dividend, strong consumer demand, less reliance on exports, benign oil prices and strong global liquidity.

Mirae Asset Global Investment Group expects Indian markets to remain strong in 2011 on robust corporate earnings, improving ROE and expectations of strong global liquidity.

A significant upturn in the investment cycle would be the key driver for continuous strong performance.

OOMMEN A. NINAN

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