2010 investing challenges

Consider this before you read any prognosis for 2010: anything that's being written about investing in this year can, and probably will, go wrong. Over most of 2008, the Indian stock market, against all hopes to the contrary, smashed the bulls into submission, only to post an unimaginably strong pullback starting in March 2009, when the bulls were busy licking their wounds. Stimulated by government-induced stimulus packages, many emerging markets posted triple digit returns over the year, well beyond the wildest dreams of investors. From early March to mid-December, the Sensex gained an astonishing 99 per cent, surely the best intra-year gain in history.So how should you tread this investing minefield in 2010? In a word, carefully. We've just discovered that India is immune to global meltdowns (well, almost). It is on the verge of multi-year, secular growth. As investors discover that India is one of the two or three countries in the world where this is possible, it will be difficult to lose money here in the long run.

But what about the coming year? This seems a little difficult to figure out, not only because markets are tough to predict over the next one or two quarters, but also because we are already in a comfortable territory.

Some reasons for caution...

Here is why you need to be a wary investor in the coming year.

• Sensex 17,000 roughly translates to about 17 times one year out (2010-11) estimated earnings, which is over 10 per cent ahead of the long-term average of under 15 times. Not bubble territory, but it requires pump priming (read, easy money) to grow beyond current levels and absorb new issuances without a murmur.
• Commercial credit growth has sagged over 2009-10 and will probably take all of 2010-11 to climb back to 20 per cent levels. This will be aided largely by higher allocations to capital-heavy infrastructure projects, where return on capital is lower and gestations are longer.
• The government has been lucky to be a large borrower during a time when private sector credit demand has been low. As private sector demand grows, you may expect a mild hardening of interest rates in mid-to late-2010. Rates could be tightened even earlier, as food and street inflation run ahead of official broad basket figures. Also, you can safely expect most excise and service tax reliefs to be rolled back before or during the Union budget in February. Not very decent times to turn bullish on the stock market.
• The recent spate of large-ticket paper issuance (mostly power companies) is likely to continue as more issues hit the market, including some from the government stable.
• Foreign inflows have been positive to the tune of over $17 billion over 2009 compared to an average of $10 billion over 2005-7. In 2008, foreign investors pulled out over $10 billion from the Indian markets as the global credit squeeze led to a forced exit from India by many leveraged and fickle foreigners.

If a fresh financial crisis were to loom again, we could see some quick exits from India, especially since we are sitting on sizeable gains over 2009. On the other hand, even a strong recovery in the US equities, as also the dollar, could see a flight of capital from Indian stock markets. It seems that we require the uncomfortable economic status quo in the western world to continue for our markets to remain attractive.

...And some good news for the long term

Here are some reasons for believing in the India story over 2010 and beyond.

• Indian consumers represent the second largest national pool of spenders, at an early stage of multiyear growth in consumption. The Indian consumer is poised to increase spending in sectors ranging from FMCGs to automobiles, media to housing, and retail banking to insurance.
• After years of seemingly random cut and thrust, we are finally beginning to see the first organised megamoves in the infrastructure sector. The private sector is about to grab the lead in power capacity addition, sixlaning of the Golden Quadrilateral is on, several Indian ports and airports are beginning to look, and work, world class, and urban infrastructure investments are taking place in major cities. Not only does this mean more business for equipment suppliers or infra-ownership firms, but the infrastructure once created will lead to multi-year increases in productivity, which will improve the competitiveness of Indian businesses globally for years to come.
• Several new sectors with multi-year growth potential have now emerged as government policy and evolving consumer priorities have combined to create new opportunities that run wide and deep. These span sectors as diverse as retail and fitness, education and training, media and entertainment, wealth management and micro-finance, and agriculture and biotechnology.
• Oil prices have stayed relatively benign, and there is little to suggest that they can get back to the dizzying heights of $150 and beyond. This, along with the rapidly increasing output from Reliance's KG-D6 gas fields and Cairn's Rajasthan fields, will keep the balance of payment and fiscal deficit under control. This translates to improved prospects for the rupee and increased stability for FII inflows.
• Indian IT firms, among the most competitive globally, have had a remarkably stable 2009. While profits have not grown at 20-30 per cent levels as in the past years, many frontline firms have posted a mild rise in profits, reconfirming the long-term bull argument for India's IT story.

Even if there is a correction in the first few months of 2010, the secular growth story underlying the economy will provide a high support level for the markets and the multi-year party may well begin again.

So which side of the fence should you be sitting on? Both sides have several valid and weighty points. According to this reasoning it would seem that barring outlier developments, we should see 2010 ending at roughly the same levels as 2009. Not quite the extremes that help glamourise expert views in the investing media. I guess it's time for the genuine stock pickers to do some bottom-up mining. And earn their fund management fees, for a change.

Dipen Sheth is the Vice-President, Institutional Equities, BRICS Securities.