What is the outlook for equities in 2010?
Going forward, with valuations close to long term averages, returns are likely to be more driven by earnings growth. After such a sharp rebound, the market is likely to get circumspect and the focus is likely to be more stock-specific this year.
While the markets have more than doubled since the lows of March 2009, we need to put things in perspective. Sensex levels of 20,000 in January 2008 and of 8,000 in March 2009 were aberrations. The rally from 8,000 has been sharp, but to be fair, that rally came after an equally sharp fall. This rally has merely corrected a severe under valuation.
In the near term, the market is likely to focus on the ongoing third quarter results and after that on the Union Budget. In the medium term, the shape of the domestic economic recovery and the inflation outlook will remain important. Over the long term, the chief concern remains inadequate infrastructure but filing this gap also provides tremendous opportunities. Overseas, while the global economy has stabilised, the recovery path is still unclear. Thus, the impact of the withdrawal of stimulus measures will also need to be closely watched. It is very difficult to predict the market levels for 2010, but in our opinion, if we take a 2-3 year view, returns should be in line with the earnings growth rate of ~ 15% CAGR.
Which sectors likely to out-perform and under-perform during the year?
Firstly, rising infrastructure spend, be it on roads, power, airport or ports is likely to be one of the key themes over the next few years. This in turn will benefit a number of downstream sectors such as construction, utilities, capital goods and materials. Secondly, rising affluence and trends such as rapid urbanisation and a young demographic profile will spur consumption of consumer durables and non-durables.
Accordingly, we are overweight banking and financial services, capital goods, pharmaceuticals and IT. We are underweight on automobiles, oil and gas, real estate, metals & mining and power.
Do you see midcaps out-performing large caps in 2010?
A large part of the valuation gap between large caps and mid-caps has been bridged. Presently, the picture is mixed, ie, there are some undervalued large caps and some undervalued mid-caps as well. However, the large cap indices may lag mid-cap indices as some of the index heavyweights in large cap indices are fairly valued. Finally, mid-caps carry higher risk – both of weaker companies in some cases and of less liquidity. Hence exposure to this segment should be controlled in portfolios.
Will the government withdraw fiscal stimulus anytime soon? What is your GDP forecast for FY11?
Timeline of withdrawal of fiscal stimulus is uncertain, though it is likely to be phased over a period of time. GDP growth for FY11 is expected to be in the range of 7.5-8%.
To what extent do you see bond yields hardening?
Market yields are already factoring a good amount of tightening next year. Also, the government’s borrowing is not expected to be much higher than CY2009. Thus, yields are expected to be range-bound next year with a slight upward bias.
What would be your inflation target for end 2010? What could be the extent of policy rate tightening by RBI?
After the initial rise to around 9-10% in the first half of 2010, the inflation is likely to stabilise around its long term average of around 5-6%. RBI is expected to raise the policy rate by 75-100bps during the course of the year.
What are your key expectations from the 2010 Budget?
The key expectation from this budget is a clear roadmap to reduce fiscal deficit. Apart from a phased / full roll back of fiscal stimulus, oil product pricing reforms are urgently needed. Taxation reforms pertaining to GST and Direct Tax Code will also be keenly watched.
As a fund house, you are overweight on pharma and banking space. What are your long term views on these sectors?
Our investment picks largely follow bottom-up approach. Our positive view on the banking and financial services sector is driven by the fact that it is a direct participant in and beneficiary of the long term growth in the Indian economy over the next few decades due to its key role in funding infrastructure development and domestic consumption. Our positive view on pharma sector is largely driven by the cost advantage enjoyed by select companies.