Expect Realistic Returns

The stock market had been trading in a narrow range of 150-300 points of Nifty and it has broken out of this range. Global market movements and strong macroeconomic fundamentals have supported this move. Long term outlook on Indian stock markets remains optimistic bar-ring some global & domestic risks.

India has remained insulated from global melt down because it is primarily a consumption lead economy. However, India has remained highly dependent on global capital flows to finance its growth requirements. Also, FIIs have remained dominant players in Indian stock markets hence increase or decrease in global risk appetite reflects strongly in stock market movements.

Although global macroeconomic environment has improved substantially, there are headwinds. Impact of withdrawal of stimulus on developed economies is one such uncertainty. In economies like US, consumer as well as government is highly leveraged. It is necessary to bring down this lever-age for long term sustainable growth. Reduction of leverage would require lower consumption & higher savings. Any reduction in consumption would impact economic growth in foreseeable future. Besides this, current strong growth is partly due to low base effect and strong stimulus both of which are not lasting in nature.
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Similarly, European Union is facing crisis of near sovereign default. PIGS countries (Portugal, Italy, Greece, Spain) are running high fiscal deficit & hence high government borrowing as a percentage of their GDP. These countries have adopted Euro as a common currency and hence do not have independent monetary policy. If no sustainable solution is found for such countries, EU runs the risk of disintegration.

Another risk is the policy of currency pegs adopted by many countries. Biggest worry comes from China which has pegged its currency w.r.t. US dollar. USA is planning to declare China as a currency manipulator so as to put quantitative restrictions on its exports. If this happens, retaliation from China, which is one of the largest holders of US government securities, cannot be ruled out. Hence, above mentioned global risks may lead to uncertainties and hence volatility & painful adjustment in global markets.
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For Indian markets, corporate earnings growth & valuations would sup-port markets. Indian markets are trading at 16 times one year’s forward earning. Therefore, in the short run global uncertainties may prevent markets from either leaping up too high or taking a major dip. Third quarter corporate earnings have show turn around and this trend would continue in fourth quarter corporate results as well. Corporate profits for Sensex group companies are expected to grow at handsome 20% for FY ’11. Public & Private investment lead themes may play out well in stock markets hence sectors like capital goods, power trans-mission & infrastructure sector may outperform. However, current year is going to be a year for bottom up stock picking as we do not foresee any major trending move in markets.

India, with its favorable demographics would be the key beneficiary of reallocation of global capital in favor of emerging economies and hence long term prospects of earning handsome returns on equity investments are high. However, investors should be realistic in their returns expectation and their asset allocation call should be long term in nature based on their needs & risk appetite. It would not be wise to chase historical market performance.