It was mid November 2009 when I wrote my previous article titled “Surging with the Emerging”. As we step into the first month of the new calendar year, the market scenario has hardly changed.
The world economy has shown prominent signs of recovery over the last few months. The US woes may be far from over but at least, there’s no likelihood of any new devils threatening to weaken the slowly-but-steadily convalescing economy. Among the non-west high-flying markets, China continues to lead the pack. Its exports have grown dramatically; the auto sales have been phenomenal; overall consumption is on a new high. We firmly believe that the fears of a worldwide stimulus withdrawal spree are overplayed, if not unfounded. China has indeed hiked the Reserve Requirements Ratio by 50 percentage points but we do not reckon this to be a serious monetary squeeze.
Back home, there’s ample liquidity in the system. The mutual funds are rolling in cash - the ULIP collection of the last quarter has been noteworthy. Even if RBI tightens rates, it would be done in a phased manner and with ample liquidity and relatively low credit growth; this is not expected to trigger a hike in lending rates.
More importantly, the economic and financial indicators have been promising. IIP and GDP have been strengthening while budget is anticipated to be “pro-growth”. The current stability in Indian polity signals a good momentum for economic progress. Indian corporates have strengthened their balance sheets; positive Infosys numbers is a harbinger of good times for the IT industry and the outsourcing market. The world recession is now expected to force many bigwigs to outsource their IT and BPO operations faster than before. The Q3 results for Sensex companies are expected to be decent with an anticipated growth of approximately 25 per cent in profits.
So what does all that mean?
Inflation is on its way up but if interest rates don’t rise as fast, it would only spell good news for stocks. Even though valuations don’t exactly appear attractive for Nifty companies, some may be re-rated on better than expected results. Select midcaps are expected to witness huge money flow. There has been renewed interest in midcaps – even by hedge funds which had all this while turned their back to this category. The year of 2010 is expected to see a surge in bottom-up picks trading at relatively attractive valuations. Many stories like Consumption themes, Infra related stocks, Auto-ancillary, IT, Metals are expected to witness high interest.
As the overall markets are expected to be volatile in the medium term, Bottom-up and on-dip buys still holds good. Any minor corrections notwithstanding, the ample liquidity today leaves little room for any major slide.
Economic growth backed by liquidity support should see us through in the coming time but do keep an eye on some eventualities, prime among them being a faster than expected RBI exit policy, rise in crude oil prices and disinvestment-led liquidity evaporation from secondary market.
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