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2010 : YEAR AHEAD |
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Updated:
A challenging year ISSUES Valuations are expensive, which everybody believes. Liquidity is not going to go in a hurry. The economies are recovering. Inflation is high and bunching up of paper, which is
waiting to come into the market. Some point probably we see a bit of dollar strengthening,
which shakes up markets a bit. 2010 is going to be different compared to 2009. When we
started 2009, there was pessimism all over. The valuations were extremely
depressed and so we could have a very strong rally once the pessimism
decreased. 2010, people are starting with a note of optimism. So we have to
be more careful; when everyone is optimistic, negative data points can have a
bigger impact on the markets. We are also starting at a valuation zone which is sort of
average, the market is not probably that undervalued, it might not be
overvalued either. We believe that the fundamentals will improve. We think
the growth that the companies and the economy can achieve can be higher. But
certain amount of the growth has already been factored into the stock prices
as well. So while we think that the market can do reasonably well, We think
it is best not to be too optimistic about 2010. While we have been speaking about increasing liquidity i.e.
demands for equities, we think the supply pipeline has been growing faster
than the demand. So ultimately how the market is going to perform is going to
depend on demand/supply balance and if we have a spate of new issuances, it
can also lead to weakness in the market. 5180 has been a bit of an enigma for the market for the
last two months—couple of times it has gone there, hit that and come out. We
have crossed it on Thursday and closed just under it. But we think the bigger
picture is the trend and how things are panning out across equity markets
throughout the world. At that place we find that there is no real major risk
to the market. Yes, we could have got stuck at a level and spent a couple of
months there, but you will notice that this kind of basing formations that we
have seen in the last year to a year and a half is not just to India, but in
most developed markets. If you look at the MSCI World Index, the MSCI Emerging
Market Index, MSCI Secondly, the important thing is that—it is pretty good in
terms of other indicators. If you look at the sectoral indices, we have
almost three-four sectoral indices at lifetime highs and when you have so
many sectoral indices at lifetime highs, we don’t think that the rally will
end and whether a level gets taken out if not today maybe next week, next
month whatever. But the important part is that the trend is higher and we are
by classical Dow Theory in a higher top, higher bottom scenario and today on
an intraday basis, we have got into a higher top. So we do think that we will
set out higher levels, a couple of points here-there is anybody’s call.
Global markets and sectoral leadership is what gives me the optimism. We think 5500 is something which even when you go back and
look historically—that had been a resistance area for us. So we do think that
it is doable. A lot of traders and investors who have been sitting on cash
and waiting to buy on corrections which was around 4500 which doesn’t seem to
have materialised at the moment, but we think at
some time they will have to put in their hat. So we do feel that the market
is under-invested or under-owned at the moment and breaking these levels will
get in these kind of players. You are again having
the frontline stocks that are leading this rally. These sectors, these areas
add a lot of volume and fizz and that translates into the Nifty—that is where
you get your index levels.
The view
is still reasonably cautious. The valuations still are little bit of a
challenge and over the next few months, we got to deal with some kind of a
withdrawal of the easy monetary conditions that are currently prevailing and
we have also got to deal with the issue of fiscal deficit and starting to
roll back, the fiscal stimulus that was given to the economy last year. So there
are a lot of challenges and the valuations do not leave too much on the table
in terms of making the market attractive. So the next year is going to be challenging
and it will be challenging not just for reasons particular to India but also
the fact is that we have been extremely correlated with trends overseas,
directly correlated with equity markets and other risk assets and inversely
correlated with the dollar. We are not seeing those correlations or that kind
of induced volatility go away in a hurry. So that’s going to be another
challenging year next year as well.
2009 has
been one of the best years we have had in ages. So we had a very strong
performance going to be the market so I think next year is going to be a year
of consolidation where probably markets don’t do much. In fact we have
forgotten what a consolidation is because the last time we had a single digit
move in the market it was in 1992 and we think next year is going to be one
of those years where markets really are going to consolidate and not do too
much. Having said, we are expecting a first quarter correction in the
markets.
Our
sense is that volatility might actually come back and definitely maybe in the
Q1 or the first half of the year and the reason for that is also because if
you look at the typical volatility measures they seem to have come down
pretty dramatically to levels, which were almost prevailing more than year
and half ago when we were in far more sober times. Our
sense is that you will most probably see a spike in volatility again. The
other reason why we think volatility is here to perhaps stay is that
increasingly over the last 18 months, we have just seen these correlations
become tighter and tighter across the world. It is almost like there is one
orchestra conductor out there and all the markets are beating to the same
tune and because of this you tend to find volatility much higher than you
would have found otherwise. So we think these are times we are living with,
and it is something we will have to just put up with for the next maybe year
or two.
The Fed
is getting more bullish about the
We do
not think the equity market would be very much affected by change in the cash
reserve ratio (CRR) or in the repos, which is
widely expected in the end of January because on the ground the liquidity
situation of the lenders is very strong though we are seeing the last
fortnight the credit off-take has improved perceptibly in the nationalised banks. However, the liquidity flow is good.
So we do not see any liquidity strength in the market as such. The
problem here is how to read this inflation because the economists are saying
that we should not commit the same blunder we did in July-August 2008, when
we tried to cut demand by sucking liquidity. The inflation didn’t have
anything to do with demands really. So people here are wary in the planning
commission and in the government to do anything which will upset the growth. On the
other hand, RBI takes it role as a champion in inflation fighting. We believe
people are tending to overplay the importance of monetary action from the
stock market especially foreign economists play too much into that.
With
global policymakers indicating their intent to mop up some of the money
supply early next year on expectations of rising inflation, investors are
pondering to what extent such moves will impact investor sentiment.
The
investment bank expects RBI to raise the cash reserve ratio (CRR) - the
amount of cash banks need to deposit with the central bank - in early 2010,
followed by hike in repo rate - the rate at which
banks borrow from RBI - of 125 basis points during the year. Ii is
expected that the 125 basis points of tightening repo
rate, though substantial, should be viewed in the context of the 425 bps
reduction from October 2008 to April 2009.
Investors
will closely watch the government’s actions to drive economic growth in 2010.
Share sales of public sector companies, deregulation of the oil sector and
reforms in the pension and insurance sectors are expected in 2010.
On the
other hand, inability or disappointment in implementing reforms can lead to a
P/E (price to earnings) de-rating.
We will
see a lot of PSU names, where government is disinvesting, will start leading.
For example if government was to disinvest NTPC or NMDC or Steel Authority of
India and when they go around the globe talking to various investors, what is
their potential versus India’s potential and how they stack up versus any
large Chinese company or an European company or a US company. When the like
to like is compared by a global investor, the people will realise
what is the potential of
There is
very interesting dichotomy here that you actually look at where the earnings
growth is coming through in 2011, it is actually getting driven by the global
cyclicals, it is not being
driven by the domestics. The
domestics are already having a reasonably good year in 2010 and they will
continue or sort of maintain that momentum going into 2011. But the
big jump that you are seeing in earnings growth is coming from the global
cyclical areas. So in a very perverse way what you need for those earnings
growth numbers to come through is tremendous amount of follow through or at
least sustenance of the current trends that are seeing at the global cyclical
areas in terms of prices. One
might argue that that is also divorced from the reality in terms of demand
supply for commodities. But the fact remains that if you use those prices as
a base number for your forecasts in 2011 that is what is driving the sharp
earnings momentum in 2011. So there
is a huge dichotomy over here. If you feel strongly about the domestic
economy then there really isn’t so much by way of acceleration for next year.
It’s the global side of it which is driving the next year’s acceleration. Global economic conditions - The state of the global economy is one of the main factors
that drive the sentiments in the stock markets.
Developments in
Positive
on banking industry, IT and pharma, Tier-II stocks may offer better
appreciation than the large market capital companies. These two sectors could
get into leadership mould in the New Year as soon as we see turnaround in the
markets. Investors
can bet on infrastructure, construction and especially commodities and
capital goods.
The big
game changer for 2010 is the government’s handling of inflation. If they are
able to moderate inflation, keep it at those 5-6-7% levels and if interest
rate hikes don't go up materially, then that can be a game changer because if
that be the situation, then we can talk about India sustaining the 7-7.5% growth
for a longer period of time and if that happens, we will continue to see good
corporate earnings. We will continue to attract a lot of liquidity globally.
Companies will be able to raise capital in a relatively easier manner and
those are all the ingredients for the markets to do well.
We
think, the global market correction has a bigger impact on fund flowing into
the country, so if the global markets stabilises,
the fund flow will be much richer but if there are corrections in the global
market, then the global fund managers in their allocations are little bit
risk averse and then moving very slow. The
first 3-6 months is liquidity and in that liquidity, if the corporations here
start showing earnings, then next six months will be earnings. Last
bust, which has sent everybody cautious globally has
allowed a lot of regulators to regulate the market, so we do not think so for
next 3-4 years, we expect some kind of a bubbly situation. The only thing,
which we need to know is how inclusive the growth in each country.
We
believes that there will be a lot of activity in the market post January 15
which will bring back some of the interest where people have forgotten some
of the frontline stocks. The quarterly results will be out by then. People
would once again start looking at frontline stocks going by the results. Also
the pre-budget expectations always beings some amount of rally which should
happen somewhere by January 15 and after. So from that perspective we are
definitely going to see lot of activity at the lower price levels, if the
market gives that opportunity. At the same time from the foreign
institutional side also post January 15 we are going to see fund allocation taking
place and activity would resume significantly at such point of time. Also,
more and more investors are keen to bring dollar inflow into the market if
they get the currency advantage. People are keener to bring money and invest
in India paper.
· INFRASTRUCTURE: On the medium and long-term we are positive on the
infrastructure sector where construction companies particularly road
construction companies look good because a lot of order should be coming in
the next six months. · POWER & ENERGY: Power looks good and power equipment looks good and since
we are getting into the later stage of the cycle capital goods should look
good because the capex should start to improve from
here onwards. We are also positive on probably some alternative energy sector
where because of the · FMGC: We are positive on fast moving consumer goods (FMCG)
companies because of the shift of the growth to the rural areas also food
inflation could actually be positive for some of the FMCG companies because
of the shift of money from the urban to the rural areas. · CONSUMER ORIENTED SPACE: Well, it
looks like the consumer. Consumer as a space has done relatively well for
2009 in terms of market capitalisation and prices
going up but I do not think they are in a state of exuberance or mania or
anything like that. And if you were to kind of really look at the list of
companies planning to go public, there is a food company, which is planning
to go public, there is a kids wear company planning to go public, there is a
gaming company planning to go public. We have just seen some IPOs of a spirits company going through or media company
going through, so all in all, what it looks like is that 2010, it is quite
possible that liquidity will chase consumer and consumer-oriented businesses.
· TECHNOLOGY: Technology
will do well. Technology has the potential to outperform the market.
Technology could be set to be a high beta on the recovery in the As far as IT is concerned, its doing well obviously things
are picking up for them but there the valuations are looking a bit stretched
at this point of time and while on the medium-term these stocks may do well
but in the short-term you need reasonable correction to make them attractive
to get into. · PHARMA: Pharma
index have shown some kind of strength versus their component into the
various indices. Now that you have to live with it unless some thing changes
and they comeback into the indices but pharma is here to stay and the growth
is going to be because even US healthcare plans is going to give a big
impetus to lot of generic companies who are doing businesses in that space. · AUTOMOBILE: The fuel
cost, which has not moved up, which is a very large component is also a big
driving factor, so it is not going to hurt their pocket till the petrol and
diesel is still controlled environment. And the other and important factor is
the availability of funding. The most of the banks because of whatever
happened in West were not lending, have started lending, which is allowing
this growth to come back. What is
going to happen in 2010-2011 is largely it will depend upon how the interest
rates are moving. We do not think there will be any primary cost addition in
so far as the cost of production is concerned for the auto company. The
growth what we have seen in the last three quarters and hopefully in the
January to March quarter, it will be slightly muted for the next year because
you are bidding on large base. To that extent, autos have run up but they
have some more steam left depending upon how the interest rates regime is
moving, we will take a call on the auto sector. · TELECOM: There is
lot of war happening in the telecom sector. There is 3G, which is going to
come in. Before that, the government has implemented 3G into BSNL and MTNL.
At the same time, the new players who have started coming at 1 paisa and 0.5
paisa/sec charges, so this model looks to us unsustainable. So in next 12
months to 18 months, you will have the people shutting either shops or
getting sold out cheap because of un-sustainability. If that consolidation
happens, then the scene will change but we see a problem going forward into
telecom sector. It is
advisable to avoid for next 12 to 18 months. · BANKING: The
banking segment up till now has been in a very slow mode of either recovery
or non-recovery but going forward if liquidity is good and the demand for the
corporate bonds and corporate money is going to be better to build India,
then banking will have to do well. We are positive on banking although we see a little bit of
a downside from here for the time being because of rising interest rates but
if the economy is going to grow at 7-8%, then banks have to do well over the
medium-term. · EDUCATION: There
are only four or five names but as we go along, there are many people who
have started looking the education very seriously. There are many private
equity deals, which has happened into the sector and you will see over a
period of time, those companies coming into the market, Career Point, FIIT
JEE, and there are few names, which are of national level, which will look to
their footprints and that segment looks very vibrant because in today’s term,
education to any Indian is a ladder to any job or growth because we have the
people in our rural sector who are not educated and they are unable to do
greater things in life. The moment they have access to education and a specialised education, when you train them from 8th
standard onwards till 12th standard onwards, so they become a better lawyer,
a better doctor, a better engineer or a better technical person. · RETAIL SPACE: Positive.
A couple of reasons for that. If you see 2007 2008 or 2008-2009, there was a
lot of bad news, which came in terms of high rentals and then you have low
off-take. Entire thing looks corrected now. The bad phase looks over for all
the retail companies. There are M&As
happening, restructuring happening and some amount of consolidation, they are
all in the right direction. What's going to happen is economy will move at 8%
at the least, hopefully beyond that in 2009-2010 and 2010-2011.
Retail is one, which has to perform very well and given all the indications,
they will do very well. Retail as a space looks once again for us as a good
investments target. We will add one more thing here. The entire sectors,
which are domestic oriented looks very, very good for us and that include
retail as well, even medical tourism even though its dependent on outside
arrival but within the country, the scope is there for much. So every sector,
which is got domestic oriented for the next 2-3 years, it is a good long-term
investment at these levels. · METALS: Metals should be meeting a lot of resistance at higher
levels now because not only is India going to tighten but probably somewhere
down in the second half of next year, we are also going to see some
tightening happening all around the world. Also metals etc, have been going
up largely on the theme of dollar weakness and we have seen the Dollar Index
start to move up now from about 74 to 77-78. So we think these two things should put a pressure and it
seems that there are inventory levels and most of the metals have gone up -
real demand has still not picked up so much. Metals do not look too hot to us
at this point of time. More updates coming soon……. Keep
visiting : www.GreatTipsIndia.com
2010: A Year of Consolidation The year
2009 was excellent for commodities investors and traders. The base metals’
pack was the largest gainer - not surprising considering that the focus of
the various stimulus packages was vintage Keynes i.e. a reduction in interest
rates and combined with government investment in infrastructure. This was
accompanied by a rally in crude oil prices mirroring the equity market
movements. Precious metals shone again with HNIs,
retail investors and even governments ploughing
money into bullion and looking at portfolio diversification by buying gold
and hedging against the dollar. While
the general increase in commodity prices came on the back of increased
confidence in how the world economy would perform, investors used the
opportunity to take long positions and realise huge
gains. Over 2009, copper prices increased by over 100%, crude oil by 70%,
silver by 50% and gold by over 25%; this has led to increased investing and
trading interest in commodities of all hues. 2010 is
likely to be the year of consolidation as far as commodities’ prices are
concerned. The price outlook will mainly depend on the demand - supply
equation generated as a result of the indicators that confirm that the deep
recession witnessed last year has ended. The second major driver will be the
strength (or weakness) of the dollar versus a basket of major currencies
notably the euro, GBP and yen. Third, the predictability of Chinese demand
will play a major role in pricing commodity assets. Finally, the focus of
some countries to build strategic reserves to combat price situations like 2007
may further add to demand pushing up prices. The rebound of global equity
markets from the lows of 2008 has infused investor confidence in markets even
if it cannot yet be called a full-blown recovery.
All will
depend on how US housing stats and all the other US production and growth is
recovering because most of the people are taking free money from US Fed,
which is at 0% or 0.5% and running their companies. How long it sustains,
that is going to allow the dollar to strengthen or not allow dollar to
strengthen. Having said that, the commodity boom is largely on two part, one is consumption and second is the cost of carry.
Today is mostly on the cost of carry because if you have to keep your aluminium stocked up, you do not have to pay any money as
interest to stock that, so people are stocking it, so that boom is a
susceptible boom versus if dollar starts strengthening, that whole thing will
unwind.
The Fed
may have difficulty in raising interest rates, so money will be still
available at sort of a free nature. The crude will be dependent on the
consumption and if the emerging market consumption goes up, the crude prices
may not come down. All the commodity prices will be dependent on the
consumption back in
Historical Year 2009
will go down in history as one of the best for Indian equity markets, after
1993 and 1999—this year, they have emerged among the top-four performing
markets in the world (report). It was
the calm after the storm, and a much-needed one at that. After the carnage
witnessed in 2008, 2009 saw the global equity markets calming down and the
Indian markets made the most of this, becoming one of the top four performers
in the world. Foreign
institutional investors played their part. They pumped in nearly USD 17
billion over the year. Of this, nearly USD 7 billion came from QIPs, USD 3.3 billion came from IPOs,
and over USD 3 billion came from ADRs and GDRs. Helping
the The tech
index rose 130%, and the auto index rose 200%, but both these performance
were eclipsed by the metals index, which surged 230% over the year. Jindal Steel
& Power led the way, gaining nearly 380% followed by Sterlite,
which rose 225%, SAIL which rose 205%, Hindalco,
which rose 200%, and Tata Steel which gained 180%. The
banking sector also bounced back smartly from 2008's drubbing. Most banking
stocks gained around 100% each in 2009 but walking away with the honours are IndusInd Bank with
a 270% rise, Central Bank, up 240%, and Yes Bank, with a 233% rise. However,
not all sectors had a ball. Some heavyweights like HUL, Idea, and DLF posted
just modest gains. The telecom sector took the worst beating, as tariff wars
kept investors away. Over the
year, Reliance Communication fell 20%, and Bharti Airtel was down 10%. CEOs are
confident that 2010 will be a good year, after all,
they have survived the upheavals in late-2008, and the uncertainty of 2009.
But analysts are not so gung-ho. They say that while 2009 has given strong
returns to the brave, 2010 may not see a sustained bull run, as markets
consolidate. |
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