The year 2010 passed off as a pretty eventful one with the stocks markets gyrating in a very narrow range for a large part of the year before taking off in September and ending the year with gains of around 17%. The beginning of the year saw a generally positive tone pervade and the various concerns as in Euro zone,
The uncanny part about the beginning of this year is that the issues and positives seem to be more or less the same as last year and the only positive besides all of those seems to be a recovery of sort in the US economy with most parameters being tracked out there coming out better than expectations over the last few weeks. I believe that the key events to watch out this year will be as follows (not necessarily in order)
Will any euro zone economy default – The pressures being faced by a number of euro zone countries seem to be such that any sort of reorganization or loan repayments, bailouts etc without a haircut to bond investors is eventually going to only prolong the problems. Given that devaluation of the currency is not an option available to these countries in order to kick start their economies a combination of very high refinancing costs as well as fiscal constraints will lead to a lost decade for most of these countries, unless they decide to default and restructure for a faster recovery. Given that the real cut in budget deficits for most countries in the Euro zone as well as
How fast will
Quantitative easing – The huge incremental quantitative easing by the US Fed has led to huge amount of speculation in commodities’, equities as well as emerging market assets. Given that the
Inflation – This is one of the biggest issues facing
Freeze on governance due to a variety of scams – The number of issues that have come up in the recent past like the Commonwealth issue, 2G spectrum issues, Money matters, midcap stock manipulation issues etc. have created a sense of wariness in the minds of investors. Its real impact will be felt due to a lack of decision making as well as progress on policy issues. Investors will be wary of buying into mid cap names due to concerns on governance in the near term. (However without any long term impact).
Besides this a large number of projects are getting held up due to lack of coordination among ministries, specifically on the highways side as well as due to environmental issues. A number of mining, steel, power etc projects are held up due to these issues and since these are long gestation projects with large capital outlays it can have a long term impact on the performance of the economy as domestic supplies do not keep up with demand.
Global and domestic fund flows – Global fund flow into Indian equity markets set a record in 2010. Domestically investors redeemed from mutual funds and reduced investments into insurance companies. The key will be to see the progress on both fronts this year. My guess is that we will see lower overseas flows but positive domestic flows this year. Overseas flows could come down from USD 28-29 bn to maybe USD 20 bn, however incremental domestic flows could see a swing of over USD 6-7 bn due to negative flows of around USD 4-5 bn turning positive.
Performance of the corporate sector – The markets are building in a 20% earnings growth for next year. Meeting or exceeding of these expectations will be incrementally positive for the markets and an underperformance will be negative.
As I look at the markets we see that there is wariness and skepticism among domestic investors with regards to the equity markets. However markets in the
In terms of sectors the underperformer of the last two year i.e. infrastructure sector in general should be an outperformer given the huge under ownership and the fact that most investor now believe that the sector should continue not to do well even this year. Mid caps that were doing well till August and subsequently underperformed badly should see a bounce back this year. Technology should do well and banking overall should underperform. The Auto sector will face pulls of good consumer demand and rising interest rates but should overall do well. Commodities should do well in the near term before selling off later.
The dark horse for the year could be Telecom where all negatives seem have been factored in, however positives are not seen in the near term horizon.
The near term looks positive with markets likely to scale new highs in January 2011. Overall I expect the year to end at Nifty levels of around 7300 and Sensex at 24500.