The year that started with a whimper on weak global cues and the Satyam fiasco ended with a bang, with the Indian stock market reporting a whopping gain of approximately 80% for 2009.
If we consider the market’s recovery from its March bottom of 8,160, the gain appears even larger at an eye-popping approximately 113%. The gravity-defying move by the equity markets was driven by improving economic conditions and ample liquidity globally. Now as we are ringing in the new year, there is a sense of excitement mixed with apprehensions in the air. Will the good run continue in 2010?
After the unidirectional trends of the previous two years, 2010 is likely to usher in a period of volatility with the market moving in a broad trading range for the better part of the year. The focus would gradually shift from macro-driven unidirectional market moves to stock-specific investment opportunities based on earnings growth and absolute valuations. Effectively, it’s going to be a stock pickers’ market from hereon and the focus will shift to generating alpha through the ability to pick the right stocks.
Graphics: Yogesh Kumar / Mint
The outlook for 2010 can be dissected in two distinct halves. In the first half, the markets could turn edgy as the Indian economy battles some of the key hurdles, such as the reversal of the interest rate cycle led by a spike in inflation, the adverse effect of the withdrawal of the economic stimulus, the fears of further fiscal slippage and the sustainability test of the global recovery.
Moreover, valuations aren’t compelling anymore with the Sensex already trading at 17x one-year forward earnings, which is ahead of its long-term average multiple of approximately 15x. However, ample liquidity (both domestic and foreign) and relatively stronger economic revival in India will limit the downside risk, thereby resulting in higher volatility in a much broader range compared with the range seen in the past two months.
As against this, the second half should see the focus of investors gradually turning away from near-term issues to the long-term potential of the Indian economy and the strong corporate earnings beyond FY11. In addition to the well-heralded long-term growth story of India, FY12 (and beyond) would be a crucial period for the Indian economy and capital markets due to a surge in infrastructure creation across sectors, booming domestic consumption and the restructuring of the tax code.
The key risk to our thesis is a double dip recession in the developed economies or some other unforeseen event that could again flare up the risk aversion globally. Second, the Indian economy and markets are highly vulnerable to any speculation-driven spike in the prices of commodities (especially crude oil) due to the country’s high dependence on imports and its already ballooning fiscal deficit.
As investment themes for 2010 we prefer: Infrastructure and capital goods stocks, urban consumption stories such as media and retail, divestment targets and cement stocks.
Importantly, the rally since March until date was based on easing in risk aversion and improving macro picture (both globally and domestically).
However, as economies and capital markets return to normalcy, fundamentals would come to the fore which will eventually lead a shift to the micro view.