2011- change is nothing. stock markets rule ok

2011 - Crystal Ball
(This was written for the Dalal Street Journal)


Returns
P/E Open Close
25.53 Jan-08 20,325.27
12.16 Dec-08 9,647.31 -52.54%

12.21 Jan-09 9,720.55
21.82 Dec-09 17,464.81 79.67%

21.99 Jan-10 17,473.45
22.85 dec 6 2010 19,981.31 14.35%
(Above numbers are based on the BSE Sensex)

The above table is self explanatory. Indian markets have given fantastic returns, unless you were caught with your money in the markets through 2008. If you have done that, hopefully you have bounced back. It is likely that if you were caught in fancy ‘growth’ stocks and still deep in the red.
From my experience of equities, I can clearly see that ‘value’ stocks have delivered superior returns as opposed to ‘growth’ chases. You have only to look at multinational stocks like HUL, Colgate, Castrol, Cummins etc to realise this. Many Indian ‘growth’ stocks have given nothing but heartaches. Perhaps you were lucky to catch an Infosys early, but it is more likely that you may have the ilk of Ispat in your portfolio.
The charm that the MNC companies offer us is that they seem to be in dull businesses. But in a country where domestic demand is going up in leaps and bounds, their businesses benefit enormously. Most of the companies I named enjoy incredible return on shareholder funds. They enjoy their share of India’s economic growth as well as stay focused on what they do.
Our economy has kind of moved on to a seven to nine percent growth despite the government’s utter paralyses in terms of doing anything proactive (other than individuals taking a toll for putting a rubber stamp). And for the righteous ones, who think that corruption and scams will matter, do not worry. Dishonesty is a way of life in India and merely because it is out in the print does not amount to a new discovery. Ignore it.
Industrial growth can be as high as fifteen percent, if supply catches up. In many areas, including service sectors, there is a clear shortage of skilled manpower. Rising wages are eating in to profitability as well as adding to inflationary pressures. I think that profit growth is going to be a party pooper. Inflation should continue at nine to ten percent in official terms, whilst on the ground inflation will be closer to twenty. This alone should keep some profit on the table for companies.
One worry is whether the last quarter will see some dip in rural spending as farm output is getting impacted by capricious weather in most parts of India. This is something that can upset the consumption story.
In this backdrop, I would like to look at keeping my money in to sectors like banking (private banks), pharmaceuticals, engineering and FMCG. Oil and petroleum can be looked at, but the sector has limited investment possibilities. Regulated sectors (fertilizers /sugar etc ) continue to remain politically threatened sectors and usual speculation around pre budget time could provide some quick bucks. With all the controversies surrounding telecom, it would be good to pick up market leaders at declines. The trouble is that one does not know which of these companies would be the next ‘discovery’ in a scam.
The government’s selling off of capital assets (shares in PSU) and treating the proceeds as revenue, will help to dress up the shoddy fiscal position. Analysts will shift focus from Trade deficit (increasing at nearly six billion dollars a month) to Current Account deficit (buffeted by capital market inflows) and say that ‘All Is Well’. The main plank for the bullishness is continuing foreign inflows in to this market. At some point, if they wake up and think that India is not all that hot or that some other global economies offer better opportunity, the flows will thin.
2011 is going to be a year of uncertain returns in this market. Whilst I do not see a market collapse (primarily due to corporate earnings rather than macro economics), earnings growth beyond fifteen percent or so is clearly not on. So, valuations are rich and stock picking is going to be key.
Gold and silver seem to be on a tear and so long as Europe and America continue to wallow in printed money, the gold run would continue. Perhaps gold and silver would give higher returns. If you ask me about whether they are at fair value, the answer is a resounding “NO”. Clearly, our stocks represent better value than the precious metals. The metal prices merely reflect the fear on global currencies.
One possibility is of regulatory whiplash which can bog down investments. These could be accompanied by exposure of accounting frauds also. 2011 is going to be a bumpy ride in the face of rich valuations, decent economy and strong funds flows.

R. Balakrishnan
December 7th, 2010.