Wednesday, January 5, 2011

Market Predictions 2011

The year 2011 has begun and we are into the first week of this New Year. Everyone has high hopes and expectations from the Indian stock markets including the foreign investors. This article is going to be a kind of my take on what can be expected in this New Year.

Before we begin, I would like to repeat that these are my personal opinions and there is no guarantee whatsoever as to whether the markets would follow the trend as mentioned in this article.

The Year 2010 – A Quick Review

The calendar year 2010 can be best described as a wholehearted effort by the world market towards their recover. It was a progressive recovery for developing nations like India or Brazil and a moderate or a slow recovery for the developed American and European world. At the beginning of the year many analysts were skeptical about their predictions for the year but with all the major world players taking solid fiscal measures to stabilize their economies it was evident that the market would bounce back and that is exactly what it happened. Emerging nations which were export oriented along with a solid domestic demand (like India) were the first to be back on their feet whereas the developed ones which were import oriented (like USA) were lagging behind by quite a bit. Though they were able to come out of the gutters in which they were a year ago, it is not quite out in full form.

Overall, it was a positive year for everyone and the markets have done the difficult task of getting back on their feet. This is a good sign and probably a key indicator of the times to come.

The Year 2011

The New Year is expected to continue where the year 2010 left off. Global markets will continue their upward trend and the markets in emerging nations are expected to be much better off. Emerging markets will lead the recovery with the developed markets following suit.

From this point on, we will be discussing only about the Indian economy.

The Indian Growth Story:

India’s growth fortunes appear to be much more well balanced when compared to its peers like Brazil or Russia or even China. Though some people might argue that with the low cost low wage structure in China, they might outperform India, but I personally feel that with strong domestic consumption demand in India, our growth is probably much more sustainable in the long term.

All major companies in our country posted good growth and earnings in the last year and the trend is expected to carry on. Inspite of all this, inflation has been one of the persistent dampeners of the market spirits and might puncture the consumption appetite of the Indian spenders. RBI is taking all possible steps to bring down inflation to a manageable level which if happens, would further boost the market growth.

Things that might have a short term impact on our markets:

• Rising crude oil prices and considering the fact that india is one of the worlds largest consumer of petroleum products might hamper the market movement
• Geo-political issues between South and North korea, Iran and Israel border disputes, China’s plans of building dams across the Brahmaputra etc might hamper the markets as well
• The Indian Rupee has been pretty stable over the past few weeks but if the value of the rupee falls, that might affect the markets too
• Political Unrest in Andra Pradesh because of the Telangana issue might affect companies that are based out of that state or have a solid basing there. This might affect their earnings which in turn might affect the market numbers
• Bad News about the US or the European Union Economy (Which are the largest importers of items exported by India) might have its effects on our markets too

Sectoral Reviews:

The Indian stock market is a mixture of companies from a varied group of sectors. Ex: Maruti or Bajaj bikes fall under Automobiles, ICICI or HDFC Banks fall under Banking and so on. Let us take a look at how these sectors might fare in this year.

Automobiles – Neutral:
The Indian automobile sector has seen a robust growth in the past year but there are concerns about
• Whether the world markets would continue with their demand for new cars/bikes
• Whether the domestic consumption of new cars/bikes will be the same as before
• Increasing Raw Material Costs and employee wages are affecting the companies profits

Considering all this, I personally feel the auto sector is going to be neutral i.e., don’t expect fireworks in their stocks but at the same time companies that can manage their costs/expenditure and at the same time drive demand for their products might still outperform their industry peers.

Banking – Strongly Positive:

The banking sector is one of the largest sectors in the Indian stock market with a 17% share in the same. With consistent and sustained demand for high quality banking services and also increased earnings and spending power of the Indian youth and working class, the banking companies are expected to continue their solid run of business. Banks that have lesser NPA’s (Non Performing Assets or Defaulted Loans) and the ones that have a good or stable asset quality would outperform their peers. In all the banking sector is expected to perform really well.

Infrastructure – Neutral:

This is one of the most important sectors that affects the nations growth directly. Infrastructure projects worth tens of thousands of crores are currently in progress or planned. With companies not being able to raise cash for their projects and also with rising costs of cement, iron and other raw materials, the industry is not expected to outperform other sectors like say the Banking sector. Since infra projects directly drive the nation forward, the government and major banking institutions might come up with fundings for the companies but that might in turn affect the cash balance sheet of the companies. Companies that can manage their working capital, execution rate, funding requirements and liquidity & Interest rate movements might outperform their industry peers. In all, the outlook for the infra sector looks neutral like the Auto sector.

FMCG – Neutral to Slightly Positive:

Companies that product Fast Moving Consumer Goods like the soap, shampoo and other daily requirements of the people will continue to do good business. As in the case of all sectors that are driven by cost of raw materials and consumer demand, the FMCG space is expected to be neutral or maybe slightly positive in outlook this year. The fact that we cannot survive without the soap or rice or wheat will ensure that these companies will continue to make good business but the rising cost of raw materials and petroleum products might hamper the profits. This inturn might hamper the price movement of these companies. In all, the outlook for the FMCG sector looks Neutral to Slightly Positive depending on how well companies can manage cost.

Information Technology – Strongly Positive:

The IT sector has had a great year given the global economic situation. Though there have been some bad news about Americas cutting out outsourced positions to boost their local job markets, the IT companies have been consistently posting solid results. Given the fact that computers have become an integral part of our day to day life and also given the fact that they form the back bone of operations for most companies, IT services would continue to attract solid budget allocations from world businesses. Which effectively means that the IT players of India will continue their solid run this year too. In all the prospects look really bright for the IT cos.

Oil & Gas – Neutral:

The Oil and Gas sector is something that we cannot live without. Imagine having to cook without LPG or having to walk to office daily. That cannot happen but the rising crude oil prices is significantly hampering the profit margins of these companies. With government tightly controlling the price of oil in the country, these companies will have to cut down on their profits and margins in order to sustain business. Which effectively means that we cannot expect spectacular numbers from them. In all, the outlook for these oil and gas cos looks neutral this year.

Pharmaceuticals – Strongly Positive:

Healthcare companies have been outperforming the market the whole of last year because of solid exports to the international markets. With india being one of the largest producers of medicines this story is expected to continue. Also, world pharma giants are looking to establish themselves in the country by opening operations or by acquiring smaller firms in the country. As medical aid is something that everyone will need and cannot live without, this industry is expected to continue to outperform. In all the prospects look very positive for the pharma sector.

Power – Neutral:

The power sector has been one of the underperformers in the markets this past year because of the fact that capacity addition happened in a sluggish pace. Even giants like NTPC or Neyveli Lignite were not able to expand their capacities extensively. Given the development across the country, sluggish capacity addition has been one of the major setbacks for these companies. With addition of private players the story might take a reverse and the current situation of power deficit might be rectified slowly. Increase in coal and oil prices has further added to the trouble of these companies. In all, it does not look so positive for the power majors.

Real Estate – Negative:

Property prices have gone up in all the major cities of our country. Literally property has become unaffordable for a majority of the middle class working population. The prices have peaked and the sales volumes have moderated. There are not many takers for new projects and most importantly with expected interest hike for home loans, the story looks even worse for this sector. In all it does not look good and this sector might be one of the worst underperformers of the lot.

Telecom – Negative:

The telecom sector is currently the most turbulent sector in the market. With heavy competition leading to price wars which greatly affect profits as well as high operating cost are adding to the woes of the telecos. With companies shelling out thousands of crores for the new 3G spectrum allocation, their debt is piling up. With uncertainties in regulatory front (the 2G scam and the multi-lakh crore scam) things are becoming increasingly difficult for these players. In all it does not look good and like the real-estate sector, this sector too might be one of the worst underperformers.

Aviation – Neutral:

The airlines industry has been making the news for all the right and wrong reasons. With regular news about crashes and technical faults and rising cost of maintenance of airline fleets airline companies are having a tough time staying in business. But, with increasing demand for flights (almost all flights are running at good passenger strength) the situation might turnaround for these companies. But, the rising cost of aviation fuel might dampen the spirits of these players. In all, it looks like tough times ahead for these aviators and the outlook looks neutral for them.

Other smaller sectors and their market outlook are as follows:

Retail Companies – Neutral
Logistics & Shipping – Neutral
Textiles – Neutral
Tea – Positive

Overall the outlook is neutral to positive with companies that can cut costs and post profits leading the market race. Let us keep our fingers crossed and hope for the best.

Happy Investing!!!
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