2010 was a relatively subdued year for emerging markets as com-pared to their splendid performance in 2009. Despite that, the markets gave a return of about 15 per cent. Going forward, the RBI is likely to go easy on monetary tightening, which is a supposedly good move for investors. 

On the financial performance front, we expect corporate earnings to be strong in Q3FY11 and economic growth for FY11 should be in the range of 8.5 – 9 per cent. We expect markets to be bullish as FII flow is likely to gather momentum going for-ward in Q4FY11. Also, most retailers seem to be doing extremely well this quarter. Automobiles have been doing very well, too. All this indicates a very strong consumption-led growth momentum in the economy. 

As for inflation, seems like the mar-kets will be very sensitive to this fac-tor. Crude prices are moving up and may put pressure on the government’s budget deficit. If crude move towards USD 100, it can have a huge damp-ening effect on the market. On the global front, how China handles infla-tion is being keenly watched. If China strongly tightens its monetary policy or looks at currency appreciation, both of which are seen as factors impacting growth, it can have a strong negative reaction. This can cause investments to move away from all emerging markets to relative safer dollar destinations. Hence, any negative news from China will impact our markets. Of course, the effect of QE2 on US market does not yet seem to have made the desired impact and there can be negative trig-gers emerging from the US. Inflation is unlikely to rise sharply and while may still be above the RBI’s targeted rate of 5.5 per cent, it may go down further. However, crude prices can be a spoil-sport and if it keeps increasing, which it may, inflation will rise further. 

Sectors like metals, oil & gas and commodities are likely to do well. Banking, real estate and FMCG on the other hand are likely to underperform. Sectors like auto, pharma, IT, etc. may remain largely neutral in the short run. We expect some negative impact on retail loans, especially new home loans. However, overall credit growth is likely to remain unaffected and should be around 20 per cent for the year. 

On the global front, Europe is like to do much better going ahead, with UK and Germany to lead the growth. While sovereign risk issues are not yet resolved, it seems to have been miti-gated for the near term. US markets are likely to do better as the impact of QE2 is felt and hopefully corporate results will be more positive. Chinese markets had a bad 2010 and a lot will depend on how inflation responds to latest monetary steps taken by the central bank there. In case China needs to do something drastic to contain inflation, it may have a negative impact globally. We are bullish on metals, infrastruc-ture, healthcare and automobiles. 

Our advice to retail investors is to be cautious in this market as the global economic environment is still quite uncertain. However, we don’t expect any sharp corrections. Investors should look at companies with a good busi-ness outlook and which are in the sec-tors that are likely to fare better in an inflationary environment. Apart from this, there are stocks which have seen significant correction in the last few months and some of them are priced quite attractively.