2011 and beyond: What’s in store for Indian investors?

January 10, 2011

Investors look at a large screen displaying India's benchmark share index on the facade of the Bombay Stock Exchange building in Mumbai in this October 10, 2008 file photo. REUTERS/Arko Datta/Files
(The views expressed in the column are the author’s own and not those of Reuters)

For any investor globally, the start of each year gives rise to renewed emotions of hope, greed, fear, expectations and the like, of the kind of returns they will make on investments.

In India, equity markets, real estate, gold and silver investments get primary attention. So what does 2011 have in store for us?

For a start, a good part of both global and domestic concerns of 2010 will continue into the coming year. While visible signs of a turnaround in the U.S. and European economies exist, it can be expected to continue to be grindingly slow.

This means interest rates in those economies — which could otherwise pull significant chunks of money there — will rise, but very slowly. Is there a possibility of yet another PIIGS-like crisis being thrown up in the developed world?

Looks unlikely. The huge government aid, the tranches of Quantitative Easing, etc will ensure there is unlikely to be one, at least as serious.

For the domestic economy, for the next decade, a high single-digit growth closing in on to a double-digit growth appears a serious possibility. In fact over the last couple of years, there has been a gradual but interesting change in mix of contribution of sectors in India’s GDP growth.

Services had been so dominant that growth of manufacturing, agriculture and mining had stopped being in the spotlight. Over the last few quarters, agricultural and manufacturing growth have reared their heads, raising visions of a 9 percent GDP growth for 2011-12 and beyond.

FII flows, which have been a key to liquidity and the consequent rise of domestic equity markets, will continue to play a major role.

However, will FII interest and flows continue at the same level? Looks very likely. India equity market valuations (which look fairly valued currently) haven’t reached a stage where they are completely out-of-sync with other emerging market valuations.

The fact that India continues to show high single-digit GDP growth will ensure that FII fund flows continue. The only reason why they could potentially slow down is a sharp rise in interest rates in developed markets, which appears unlikely.

Domestic inflation, however, appears unlikely to show any signs of coming under control soon, particularly with oil prices expected to rise further during the year. This means interest rates will keep inching upwards, though slowly.

Interest rate sensitive sectors like real estate and automobiles will get directly affected. On the other hand, fixed income investments could become preferred options for select investors.

With rising incomes, India’s consumption story continues to act as a serious contributor to GDP growth. Sectors mirroring this consumption-led growth should clearly benefit.

This means FMCG, two- and four-wheeler companies, paints, etc. will be direct beneficiaries. Infrastructure was a clear underperformer last year. Execution of projects takes time and is preceded by bidding, financial closure, etc. This means infrastructure might not be a runaway winner in the first few months of this year too.

The second half could be better if the government too takes execution of the key road, port and power projects with greater earnestness.

Banking as a sector has shown consistent growth over several quarters now. The next two could be different. With higher cost of funds (read higher deposit rates), and lending rates not rising as much, interest margins will be under pressure. Any losses over exposure to real estate or to the 2G licence purchasing companies which are still dormant and which may just face licence cancellation, could impact bottom lines further.

But except for such event-based impact, the sector will truly mirror India’s consumption and investment-led growth story. Do not hesitate to take exposure to either of large/mid-sized PSU or private sector banks.

The government’s PSU disinvestment drive restarted in 2010. This will continue into 2011 with several mega IPOs and FPOs in the pipeline.

Gold and silver can be expected to give high single-digit to double-digit returns during 2011 as well, while real estate could run into some rough weather.

For equity markets anywhere from 12 – 15 percent return for the year may be considered realistic. Anything above that should be considered a bonus since valuations at those levels could become steep in comparison to some of the other emerging markets that too have shown robust growth.

What could be attractive sectors from a decade-long perspective? Banking, metals (ferrous and non-ferrous) and cement look to be great bets for a certainty. Even infrastructure growth, which anyways should be significant, could play second fiddle to them, simply because it has a variable that the other three don’t — government support.

All in all, we appear set for another big decade for Indian equity investors. Do not hesitate to increase or at least maintain your exposure to equities. Happy investing.

(The above article is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions)

One comment

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Good & Timely ecouragement to the optimistic investors.

Posted by S.RAJ | Report as abusive