After witnessing a sharp and meteoric move up in 2009, the markets started the year 2010 on a very optimistic note. But if we take a look at the kind of returns equity as an asset class has provided in 2010 on YTD basis, it seems that it was a year of consolidation. This is exactly what we had predicted a year back by asking our investors to keep expectations low in 2010.
In terms of returns, the year 2010 may not look exciting however it turned out to be an eventful one due to a number of things that happened this year. On the global front, issues regarding the Euro zone debt crisis and the troubles in the developed world continued in one way or the other. However, emerging economies recovered sharply and came back to normal or in some cases with better growth rates. As a result, the emerging markets were flooded with huge foreign institutional investments and India was no exception. In 2010, on year to date basis, the net FII inflow is Rs 1,31,021 crore which is the highest in history. The noticeable factor is this was on the back of around Rs 80,000 crore that the FIIs had invested in 2009. Despite such a huge inflow, the Sensex remained highly range bound and only surged by 14 per cent in 2010.
Although there were some opportunities in the small cap and midcap space, this was a highly volatile arena.This is clearly seen from the fact that in 2010, the BSE Small Cap Index opened at 8,358 then touched a high of 11,191 in November 2010 and is currently trading at 9282. Similar volatility was witnessed in the BSE midcap index. So it was not easy to make money in the year 2010. Despite such a difficult and confusing scenario, our performance has been marvelous. While the broader indices remained highly range bound our portfolio, ‘Where To Invest In 2010’, has provided returns of 53 per cent. The way we had predicted the market movement and handpicked the portfolio, clearly points towards our high quality research and efforts to create value for our investors. However, this is the past and the markets are mainly dependent on future events, so investors will be more curious to know what happens next in 2011? So let’s see what are the various factors that can guide the market in 2011?
We are of the opinion that it will not be easy to make money in 2011 either. After touching the 21,000 mark, the Sensex has witnessed a significant decline and has also impacted the overall sentiments and we expect the same to spill over in 2011 also. Apart for the sentiments, there are other factors which we feel are going to impact the market negatively in 2011. The first factor is inflation as well as the interest rate cycle and the second one is crude oil prices. Inflation has been a major factor of worry in 2010 and mostly remained above the 10 per cent mark. Although food inflation is moderating, it is likely to remain on the higher side as it is more of a supply side issue. So with rising inflation, we expect that the RBI may opt for monetary tightening and go for a hike in interest rates. The rate hike will not only impact the GDP growth expectations but will also hurt the earnings growth. Another factor impacting inflation will be fuel prices. If crude oil (which is currently nearing the USD 90 per barrel mark) continues its upward move, it will create further inflationary pressures. In addition, crude oil being the base for many raw materials, input costs may increase impacting company margins.
On the earnings front, growth has been satisfactory in H1FY11. But at current levels, the Sensex is trading at 22.50x of its trailing four quarter earnings. So to sustain these kinds of valuations at least 20 per cent earnings growth is required. As mentioned earlier, the inflationary pressures may impact the earnings growth. So considering all these factors we again recommend the investors to keep expectations low in 2011. However, whatever the market scenario, we have to create value for our investors. And like every year, we are again recommending a portfolio for ‘Where To Invest In 2011.’
The portfolio is picked up by our research team after selecting the sectors we are bullish on. We have recommended counters from Pharmaceuticals, Infrastructure, Automobile ancillary, Textile and IT. Considering the current scenario, we have tried to make a balanced portfolio. While L&T, HDFC, TCS and CESC are included to provide stability to the portfolio scrips like SpiceJet, Swaraj Engines and Suryalata Spinning Mills have been added to add some zeal to the portfoli o. We expect our portfolio to provide 20 per cent returns in the next year. This may not sound exciting but we feel this would be better returns as compared to other asset classes. The DSIJ research team wishes you a happy and a prosperous new year. Let 2011 bring good luck and fortune for all our readers
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