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In-House Research Views: What & Where to Invest In 2010
January 14, 2010

Our research team shares their investment outlook for 2010.


Author : iFAST Research Team



Untitled Document

The year 2009 has rewarded equity investors who chose to participate actively, as macro-economic conditions started to improve, both in India and internationally. In this article, we share our investment outlook for India and abroad in the coming year.

Domestic View

Overweight on equities as opposed to bonds in 2010

Here’s a quick snapshot of why we remain overweight on equities in 2010

  1. Foreign Flows: The markets will be driven mostly by corporate earnings and foreign inflows. Macro-economic factors point to a healthy growth for the economy supplemented by strong earnings growth for the SENSEX companies.  Hence, the markets will continue to attract foreign inflows into the country

  2. Earnings growth: The corporate earnings for SENSEX companies are expected to be around 23.8% and 21.4% for Financial Year ending (FY) 2010-11 and FY 2011-2012 respectively (data as on 6 January 2010). The forward PE for SENSEX is 20.3X, 16.39X, 13.5X for FY2009-10, FY2010-11 & FY 2011-12 respectively (data as on 6 January 2010).

  3. Valuations: However, with the spectacular rise witnessed on Indian bourses in 2009 – the fastest annual rise since 1991, and with valuations becoming rich, we expect the returns to be more moderate in 2010. The markets can test its historic highs seen in 2007 and beginning of 2008, but a significant rise beyond that is limited, due to a steep rise in valuations especially in some sectors. 

  4. Broader market expected to outperform: The broader market is expected to do well in 2010 and mid-cap and small-cap stocks have the potential to outperform their large cap cousins due to faster earnings growth and relatively more attractive valuations. The rise in inflation and impending rate hike by the central bank point to a price decline in bonds.
Key risks
  •    Hardening of interest rates and monetary tightening by the Reserve Bank of India (RBI) and central banks around the world

  •    Withdrawal of excise duty sops/ incentives and stimulus during the post budget period

  •     Any sharp rise in oil prices can also be a dampener for the markets

  •     Besides this, any concerns of emergence of asset bubble in emerging countries can lead to risk aversion among investors

  
Favourite Sector: Capital Goods and Infrastructure

  •     Strong pick up in industrial activity will support this sector

  •      Capital raising to kick-start the capex cycle in 2010, which will benefit this space. Strong pick-up in industrial activity and growth in manufacturing will prompt industries to expand capacities once again in 2010

  •      US$1.5 trillion expected to be invested by 2017 into public infrastructure like roads, ports, power, but we can expect at least $1 trillion to be invested in infrastructure arena and capital goods sector is one of the key beneficiaries of this investment

  •     Any reforms or incentives in the union budget for FY 2011-2012 can provide further boost to these stocks

  •     Even though valuations may be a bit rich presently, they are still far away from the historical highs seen in end 2007. Further, we expect earnings growth to catch up within this space.

  •     Earnings growth for Capital Goods is expected to be 26.4% and 21.8% for FY 2010-11 and FY 2011-2012 respectively (data as on 6 January 2010). The forward PE for Capital Goods is 26.9X, 21.3X, 17.5X for FY2009-10, FY2010-11 and FY 2011-12 respectively (data as of 6 January 2010) 

Least Favorite Sector: Telecom

  •    Falling revenues and rising costs is likely to continue and hurt the profitability of the sector in 2010

  •     The average revenue per mobile phone user is falling and is expected to continue to fall at least in 2010

  •     Increased competition in the form of new players in every circle, 1 paise plans and higher advertisement spends

  •     Further delay in 3G auction will only lead to delayed deployment of 3G networks in India and dampen sentiments within this space

 Favorite Bond Class: Floating Rate Funds

  •     RBI is expected to take measures for monetary tightening. In addition, inflation is likely to rise due to pick-up in economic activity. Thus, the interest rates are expected to go up in 2010 with rising inflation and policy actions by RBI.

  •      Floating rate funds would help to hedge investors in a rising interest rate scenario. Thus, we recommend investors to be at the shorter end of the yield curve.

  •      Most floating rate funds are presently having higher allocation to certificate of deposits, debentures and treasury bills and minimal allocation to floating rate papers. This has been primarily due to lower issuances of floating rate papers in the fixed income market last year. However with rise in bond yields, it is likely that the issuances of floating rate instruments will pick up and subsequently, the allocation of floating rate instruments in funds will increase.

 
Least Favourite Bond Class: Gilt Funds

  •     Since gilt funds are most sensitive to interest rate movement, we do not recommend these funds in a rising interest rate environment

  •     Some gilt funds have started to reposition their portfolios and have increased allocation to cash, current assets and short-term securities


Global View

Overweight on equities as opposed to bonds in 2010

  •    Globally, we remain overweight on equities versus bonds in 2010

  •    Economic growth in 2010 and corporate earnings growth is expected to be strong, helped by sales growth in conjunction with a low cost structure

  •    The average earnings yield (inverse of Price/Earnings ratios) for the 14 markets that we cover are higher than 5-year yields on government bonds

  •     An increase in supply of government bonds to meet fiscal deficits, impending rate hikes on inflationary concerns and a return of risk appetite suggest that the demand for government bonds could fall, leading to price declines

 

Favourite Region: Global Emerging Markets (GEMs)

  •    Low household leverage and healthy balance sheets of companies mean even if exports falter, the economic growth of emerging market countries can be sustained by domestic consumption

  •    Growing inflationary expectations would continue to benefit resource-rich countries like Russia, Brazil and Indonesia

  •    Earnings growth is expected to be strong at 29.3% and 19.5% for FY 2009-10 and FY 2010-11 respectively (data as at 11 December 2009)

  •    The PE ratios of GEMs are attractive with major representatives like Brazil, Russia and Israel trading at P/E ratios below 14X

 

Least Favourite Region: Japan

  •    With deflation and rising unemployment, consumption is unlikely to recover

  •    With the debt-to-GDP ratio of 200% and benchmark interest rates at near zero, the government is out of fiscal and monetary flexibility to stimulate economic growth.

  •    The magnitude of the earnings re-rating in Japanese companies is small as compared to other Asian markets.

The FSM team works hard to ensure that investors are made aware of market movements, investing concepts and guidelines that can help them make a better investment call. Apart from the website, FSM shows its commitment to investor education through investor forums and seminars.

Look out for “What and Where to Invest in 2010?” seminar coming to your city! For registration, please email us clienthelp.in@fundsupermart.com or SMS ‘FSM WWTI’ to 561561.

 


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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