What is your equity market outlook for 2010?
Equity market should fare well this year on the back of sustained domestic consumption, recovery in the credit growth and some pick up in the infrastructure spending. The mainstay and key contributor to the GDP will be domestic consumption aided by increased government spending on social reforms and the improved efficacy of such reforms.
The dominant theme for the first six months of the next year will be sustainability of the year-on-year growth numbers, both on a low base and pick up in the economic activity across sectors. Domestic economic recovery should lead to earnings upgrade as a result of volume growth and ensuing operating leverage in H1 FY11, which will give way to increasing inflation and reducing operating margins by H2FY11.
The Indian market has already seen a P/E re-rating from about 11x forward in the month of January - March 2009 to 16.5x currently, and scope for further re-rating is limited. This will lead to increasing dispersion and diversion between sectors and companies within the sectors. The key variable for valuation sustenance and / or expansion will depend on the actual delivery of this growth and flows will be diverted towards fundamentally sound companies, which are able to keep faith of the investors in terms of sustained operational performance.
From a risk perspective, high fiscal deficit and likelihood of interest rates going up are the key threats to the equity market. Sustainability of growth post the withdrawal of the ultra easy monetary policy is to be seen. For Indian markets, food inflation and monsoon remain a risk. This year saw net FII flows of US$17bn into the Indian equities as carry trade peaked due to the interest rate arbitrage that prevailed through most of the year. Any reversal of flows led by risk aversion may lead to correction in equity markets.
Which sectors are you bullish and bearish on?
We expect technology and consumption related sectors like media, staples, auto, and pharmaceuticals to out-perform. On the other hand, we expect telecom, capital goods, and energy to under-perform. We are neutral on financials and materials.
Do you see mid-caps out-performing the large caps in 2010?
We believe high quality mid-caps, which will demonstrate sustained operational performance could out-perform the overall market.
When do you see the government to start withdrawing fiscal stimulus? What would be your GDP growth forecast for FY11?
We expect the government to withdraw fiscal stimulus by next fiscal and the announcement could come in the budget speech. The key concern has shifted from maintaining economic growth to controlling and eventually reducing fiscal deficit. The main argument for keeping fiscal stimulus is losing its relevance in light of better than expected GDP and IIP growth rates in the last few quarters. However, we expect the withdrawal to be gradual and see it having very little impact on FY11 growth. We expect GDP to grow by about 7-8% in FY11.
To what extent do you see bond yields hardening by the end of year?
In light of current expectation for FY11 fiscal deficit and government borrowing programme, we expect bond yields to harden during the year by over 50bps and range between 8-8.25% yield (for 10-year government paper). We expect the bank lending rates to increase as we expect credit to pick up in FY11. Prime lending rates of banks could increase by about 50 bps during the year.
What would be your inflation target for end-2010? What could be the extent of policy rate tightening by RBI during the year?
Inflation could peak by mid-July to August on account of the base effect when it could cross into double digits. Thereafter, we expect inflation to start falling as price rise in 3QFY09 was very steep and expect it to claw back to 6-8% range by the end of the year. RBI policy would be geared towards tightening during the year. The tightening could come through withdrawal of OMO (Open market operations), reduction in bank’s surplus liquidity. We expect a mix of all the three kinds of policy response.
What are the key expectations from the Finance Budget?
Measures to withdraw fiscal stimulus, albeit gradually, roadmap for GST implementation, roadmap of Draft tax code (Treatment of dividends, capital gains, STT could be a part of this) and higher outlay for plans and initiatives aimed at rural India.
Recently, the fund house has been buying media stocks. What is your outlook on this sector?
We are positive on the media sector as we believe that it is one of the beneficiaries of the consumption story as well as of growing confidence of corporate sector in resilience of Indian economy. The lethal combination of the two factors means that advertisement revenue as well as subscription/cover price would continue to surprise positively through the year.