What does Samvat 2067 have in store for investors?

November 5, 2010

(Nipun Mehta is a veteran private banker with many years of experience across Asia. The views expressed in the column are his own and not those of Reuters)

By Nipun Mehta

Stockbrokers cheer as they trade at their terminals during the Diwali special trading session celebrating the annual Hindu festival of lights at the Bombay Stock Exchange (BSE) in Mumbai November 5, 2010. REUTERS/Danish Siddiqui After the Income Tax Department standardised the use of April to March as the financial year for all accounting purposes, in India the Samvat year (as opposed to the Gregorian calendar) really lost its significance except on Diwali day. But Samvat year 2066, which ended on November 4, 2010 will be remembered in Indian stock market history for several reasons.

Samvat 2066 saw the highest ever annual FII flow into Indian markets. It saw the largest IPO ever hit the primary market. The last day of Samvat year 2066 was the day on which the key Indian capital market benchmark index – the BSE Sensex – touched its highest ever mark for the first time after the historic January 2008 highs, on a closing level basis. And on Muhurat trading day, the Sensex closed above the psychologically important level of 21,000.

But all that is history, what does Samvat 2067 have in store for us?

There are several reasons for the FII flow to continue into emerging markets and into Indian capital markets. There is also that clearer possibility of return of retail participation into the secondary markets this time around.

Firstly, it’s been more than 10 quarters since several economies, particularly the U.S. and Europe, have been struggling, while the Indian corporate sector earnings continue to show consistent growth. Emerging markets (with India featuring high on the list) continue to present one of the best options for investment, valuations notwithstanding.

Secondly, the latest Quantitative Easing measures announced by the U.S. Fed should help sustain FII flows into India, at least till the U.S. economy shows distinct signs of a turnaround, and that appears unlikely in the next 1 or 2 quarters given the size of the aid announced.

Thirdly, while in terms of the domestic indices, valuations might not appear too cheap, this time the rise in the markets has been very selective, purely based on financial performance of sectors or companies. This is unlike an arbitrary speculative rise one has often seen in the past.

Sectors like banking, automobiles, pharmaceuticals have risen to all-time high levels, but others like infrastructure, auto ancillaries, capital goods, steel, cement, real estate etc are nowhere close to their previous highs, some of them rightly so.

Fourthly, an IPO of the size of Coal India has shown that a quality company priced reasonably can attract huge institutional funds, and hordes of retail investors. The kind of listing gains seen by retail investors in Coal India will ensure that several of them will be back into the secondary markets, while their interest in primary markets will sustain till the secondary market sees a major correction.

Between large caps, mid-caps and small caps, which ones could outperform?

While large caps will continue to rise selectively in sync with the upward momentum of the markets, I believe it is the mid-caps and the small caps — purely based on individual performance — that will outperform in the next one year.

The gains of domestic consumption, the gains of growth in sectors like automobiles, banking, etc. will over the next few quarters filter down to the mid and small sized companies and will translate into higher earnings.

In sum, there appears to be a good case for the upward momentum in the Indian capital markets to continue with a possibility of more attractive returns by next Diwali.

(You can e-mail Nipun Mehta at nipunsmehta@hotmail.com)

One comment

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No doubt mid- and small-cap mutual funds have been great performers in the past year. So Sensex at 30,000 by next diwali?? :)

Posted by aditya.kalra | Report as abusive