Here's a look at how events in 2010 will impact your investment decisions in 2011. Read on for smart investing
WITH the New Year just around the corner, it's also time to take a look at the year gone by to get a clearer view of what lies ahead. In fact, it's the most appropriate time to take a look at how stocks have performed in the past one year. This will also help you to review you portfolio and enable you to understand how your investments have fared in 2010 and whether you need to tweak your strategy. The past performance of your portfolio will also give you some clues about what to expect in the New Year.
Rewind Mode:
2010 turned out to be a year of healthy returns for equity investors as the benchmark index – S&P CNX Nifty – delivered 14.68%. The number may not appear exciting if one compares the number with the 71.45% returns delivered by Nifty in 2009. But just compare it with the performance of equity indices across the world and you'll find that Indian equities make it to the top quartile. Indian equity investors made most of their money from 'consumption oriented' sectors in 2010. The BSE Consumer Durables index registered 70% gains along with BSE Auto Index which recorded 43% return. Though the banking sector suffered a setback towards the end of the year due to the 'loan for bribes' scam, Bank Nifty rewarded investors with 34% returns over one year. In fact, most experts find the performance of Indian equities rather rewarding, especially in the context of runaway inflation and Reserve Bank of India's liquidity tightening measures that include a 125-basis point increase in the repo rate.
Tracking Valuations:
Nifty is hovering around the 6000 level, implying a trailing price-to-earnings (P/ E) ratio of 23. Experts prefer the P/E number as a more appropriate indicator of Nifty's valuation rather that the absolute value at which it is quoting. The benchmark index scaled the highest valuation in the first week of January 2008, when its P/E was quoting at around 28. If we compare this with the low of 10.68 that Nifty hit in October 2008, we realise that the index is already in the higher band of valuation. So, if there is no earnings support, gains from here may not be sky-high. The market as a whole is fairly priced. Though earnings growth remains crucial, the P/E multiple of Indian stocks has outpaced the growth in earnings over the past couple of years. The valuations went up rather quickly, all thanks to robust net FII inflows (estimated around $28.5 billion in 2010). FIIs are eagerly chasing Indian equities with eyes firmly set on India's growth over the next decade.
Expert View:
The BSE Sensex companies should offer a reasonable earnings growth in the range of 15-20% in the next calendar year," says Devendra Nevgi, founder partner, Delta Global Partner. This should translate into normal returns for equity investors in 2011. The valuations may not come down drastically if the corporates' earnings growth remain on track and the economy delivers, the P/E multiple enjoyed by the Indian equities may soar further. The market is offering premium valuations to businesses such as in-formation technology where the earnings visibility is high.
The Contrarians:
As the market becomes volatile, experts now prefer to look beyond conventional opportunities. This may be the time to consider some businesses that have been shunned by the broad market for a long period. Such segments are marred by adverse business conditions and are generally available at throwaway valuations. Telecom is one such bet that many experts are willing to look at. The price competition seems to be over in this sector and most of the possible negatives are already factored in the current prices.
Oil marketing companies (OMCs) offer a similar opportunity. As crude is nearing $90 per barrel mark, OMCs are destined to incur higher losses due to subsidised sale of diesel and other fuels such as cooking gas. This may not only push their balance sheets into the red but also mar their performance on the bourses. But one faction of savvy investors thinks otherwise. Like petrol, the government is expected to decontrol the pricing of diesel. This will ensure that these companies do well in the long term.
Investors can consider accumulating these companies on dips if and only if they understand the regulatory risk involved and are willing to hold for at least two to three years. The returns over and above the market returns are very much possible in 2011 for savvy stock pickers.
Slippery Zones:
Inflation remained the key concern throughout 2010. Towards the year-end, due to the arrival of crops and the base effect, food inflation is on the way down. Nevertheless, inflation is expected to remain a variable that all equity investors must track carefully. This is important as there are sectors such as consumer staples that have been hit by inflation, more so as they cannot pass on the rising input costs to their customers. If inflationary pressures continue, it will lead to wage inflation. This will lead to margin contraction in companies, especially in peopleintensive businesses such as information technology. Such developments can also impact the interest rate scenario in India.
Key policy rates are expected to be hiked faster than expected by markets. We expect a 50-basis point hike in key policy rates. If the interest rates remain high and liquidity dries out, the companies will face a higher interest burden and lower profitability which will, in turn, drive stocks down.
The other set of risks come from the developed nations. European economies are still in a weak shape. Some of them are 100 going for re-financing their loans early next year. A sovereign default can be a big risk for global markets. The US economy has shown some signs of revival, but many are sceptical of the recovery. Any further stimulus in the US will fuel inflation in commodities. Crude prices may also rise further, impacting India as it is one of the largest importers of crude.
Where To Invest?
Healthy risk-adjusted returns are possible. Direct equity investors should stick to companies with high earnings visibility. Small investors should invest in equities with a long-term horizon and mutual funds SIP is a good vehicle for wealth creation. If you do not have the necessary skills or lack the time to analyse businesses and track your equity investments, you will be better off with diversified equity mutual funds that have long-term track record.
