Which direction will the markets take from here?
In our view, 2011 should see moderate returns, less volatility and less sector divergences. Our macro fundamentals are great. Our economy will continue to grow at 7.5-8 per cent per annum for the next three to four years. Our deficit is under control. Corporate earnings have been strong and analysts are expecting a 25 per cent growth this year and possibly 20 per cent in 2011. 2011 should be smoother than 2010 and we expect about 15 per cent returns in the year. With GDP growth pegged at 8.5 per cent, there is scope for growth in the market. We expect market performance to be earnings growth driven, with India’s market multiple holding at 16X 1-year forward levels. All these should make Indian equities very attractive to investors.
What triggers can change the complexion of the markets?
Though there are no obvious signs that are worrisome, there are a few external risks that can cause concern. We think that conditions globally will be somewhat turbulent and volatile simply because in recent times, we have seen that the issue of sovereign credit crisis is unlikely to subside soon. Some amount of this volatility is reflected in bond markets where the spreads have been increasing. There is also the issue of rising oil prices. If the rise is gradual one can stomach it, but a steep climb can impact the markets adversely. All of this could contribute to the near-term weak sentiment in the equity markets. The positive of course is the way the Indian economy is performing.
Which sectors hold promise in 2011?
The good thing for India is that our fundamentals are very strong. In 2009-10, the driver was consumption, which has managed to play out well in a sustained manner. As growth picks up in 2011, infrastructure will get a play and be a sector with promise. Typically, when infrastructure picks up, there are many allied sectors that start to benefit. This will also trigger capacity expansion across various other sectors. Once the capex play starts, it will start pushing up all sectors which should be a further boost to the overall economy.
What is your view on mid- and small-cap stocks?
There cannot be a broad brush view on market caps unlike sectors. The complexities with market caps are immense. For instance, across sectors, mid- and small-caps will demonstrate different reasons for their rise and fall. However, risks always drive returns—this is a law of investing. Both mid- and small-cap stocks are risky and some of the companies can be driven into bankruptcy by any setback and there are also liquidity risks involved. But the potential for gains from mid- and small-caps will remain high, compared to large-caps. One would be better off selecting good stocks in 2011 than blindly chasing mid- or small-caps.
This interview appeared in Wealth Insight January 2011