Looking ahead

The year 2007 was remarkable for virtually every asset class. Money Today reached out to experts on stocks, real estate, mutual funds and commodities for their views on the way the markets will pan out in the coming times.

     Print Edition: October 30, 2008

The year 2007 was remarkable for virtually every asset class. The equity, real estate and gold markets boomed spectacularly. New and useful products and services from asset managers, insurers and banks rolled out regularly. However, this year the situation has been just the reverse for most asset classes. While the commodity markets boomed, the equity markets crashed and real estate markets witnessed a correction. So as we wrap up our Second Anniversary issue, we are once again confronted with the essential investment question: What lies ahead?

Money Today reached out to experts on stocks, real estate, mutual funds and commodities for their views on the way the markets will pan out in the coming year. We also talked to bankers, taxation and HR professionals to get a sense of the trends and changes they expect.

The picture they painted is a mixed bag, ranging from encouraging to cautious and gloomy. Clearly, it would be unrealistic to expect the gains we saw in 2007 for some time to come. In the following pages, experts ranging from our model portfolio fund manager Dipen Sheth to global market guru Dr Marc Faber tell you what they expect in the coming year and which avenues can offer the best returns.

Keep expectations realistic and look out for opportunities that come your way. The Money Today team wishes you luck.

EQUITIES

 “Bottom could be about 9,000-10,000 on the Sensex”

— Amitabh Chakraborty, President, Equity, Religare Securities

We will remain in a protracted bear phase for the next 18 months or so. It is difficult to predict when stability will return to the markets. The sub-prime problems in the US and the UK are very acute. If they become worse, we could see some more selling by FIIs, especially because the hedge funds focusing on Asia (ex Japan) are facing redemption. Hence, we believe that for the next few months volatility will continue and there may be 10-15% downside from current levels. The bottom could be about 9-10 times forward earnings—that is about 9,000 or 10,000 on the Sensex.

The upside triggers could be inflation and interest rates coming down. Also, there is a general election next year. If a new government comes with a clearer majority, it would be positive for the markets. We expect a bounce rally between now and January, followed by a dull range-bound market at 10,000-12,000 level for the whole of 2009.

As far as corporate profits are concerned, top line growth would be good to the tune of 20-25%, but the bottom line would be around 10-12%. This is a fall from the earlier high growth rate and is largely due to higher costs. On an aggregate level there may not be a decline, but at this point, our estimates (920 earnings for the Sensex vs 970) are much lower than the consensus estimates.

For the next year we would recommend investing in defensive sectors like FMCG, auto (2-wheelers), pharma and PSU banks and avoiding sectors like metals, construction and real estate. Sun Pharma, ITC, SBI, Infosys and Hero Honda are our top picks. Valuation is cheap today. It would be cheaper tomorrow. But if the market remains range-bound, stocks might not move and investors’ patience might get tested.

One can get higher returns in India than in global markets, but global markets diversify a portfolio, which is healthy.

“Emerging markets hold the key”

— Dipen Sheth, Head of Research, Wealth Management Advisory Services

The investing world has just been flattened! It’s not just stock markets, commodities or real estate. Everything looks connected, and the painful process of leverage unwinding is pulling down the global economy.

It’s a “black swan” event for sure, which makes it impossible to predict the future. But some pointers are beginning to emerge. More will appear as the pain plays out, but for now, these are the things that investors must consider:

End of US hegemony
The US might remain the world’s largest economy for several more years, but it has lost its position as the driver of economic growth. It’s not bankrupt, but the US economy is seriously impaired. Consumption will shrink and might take years to revive. What happens to the Chinese export-oriented factories and the Indian IT stories? Worrisome questions for all of us...

Emergence of alternative drivers
In spite of their dubious sociopolitical infrastructure, the sheer economic weight (and accumulated wealth) that the Middle East and China now carry will ensure that the world finds a substitute quicker than you think. The dark horses: Japan and the Eurozone.

Likewise, the investing behaviour of the sovereign wealth funds of many countries in the Middle East, the development plans of their governments and the global business ambitions of their sheikhs and emirs will decide where the global economy will go. It simply does not matter what the US president (or public) desires!

Flight of easy money
Money is becoming increasingly scarce as leveraged positions unwind across the globe. A lot of selling could be less due to dwindling faith in the invested assets and more due to the “unwinding” of money. Just as euphoric buying doesn’t worry about the price (and drives up prices beyond rational value), fire sales push it down to irrational levels. Result: even good stocks crash to inexplicably low levels.

Amidst the gloom, a few things give me hope for the future:

Emerging economies: Round 2
China, Russia, Brazil, the Asian tigers and India have led the surge in investment over the last 10-20 years. Surely, these large investments will trigger consumption booms. In fact, India is seen as a somewhat more stable economy because we have a robust domestic consumption. With three times our per capita income and 20% more people, isn’t China an even more attractive proposition?

Resurrection of America?
Don’t rule out that the US can re-emerge as a leading economic power. Why? I have great faith in the founding values of American institutions. In the values that are enshrined in their judicial system and Constitution. And in the fundamental solidity of the great American dream—to prosper, reinvest wealth and consume. By fair means. A remarkable catharsis has been set into motion by the recent crisis. Americans are prepared to take tough decisions and rebuild their nation. Maybe it’ll take them half-a-decade, but you only need to read up on the American political and economic history to figure out that if there is a nation that can claw back from the worst of crises, it is America.

“No upside triggers for the markets”

 — Amar Ambani, Vice-President, Equities, India Infoline

History suggests that an average recession in the US lasts about 12-14 months. However, this time it might last longer considering the magnitude of the problem. The bailout effect will not be felt overnight. In fact, problems in Europe have just begun to unfold. We could see another 8-10% downside before the end of this year, and the Nifty could touch 3,200-3,300 by November. Even when stability returns, we will not see a V-shaped recovery. The markets will remain subdued for most of 2009.

Currently, there are no upside triggers for the market. The first quarter of 2008-9 recorded a 12% growth in net profits, but the next quarters will witness a slower rise. High interest rates will affect corporate profits in 2009. Telecom and FMCG could be the promising sectors in the coming months.

“Corporate earnings may fall to 14-16% this year”

 — Phani Shekhar, Equity Analyst, Angel Broking

Most equities are nearing distress valuations. But markets have a way of finding order in chaos. We are looking out of relative clarity on the damage to the real economy in the West. This clarity might emerge in the next 3-6 months.

Thankfully, over a one-year time frame, the downside is relatively capped. However, one has to keep an eye on the deleveraging going on in the West. Also, corporate earnings may slow down to 14-16% in 2008-9 on the back of higher interest rates.

A key upside trigger may be a synchronised monetary loosening across the world. The banking sector may surprise on the upside because of monetary loosening. Over the next year, the Sensex should trade above 13,500 with an EPS target of Rs 910.

If you keep a two-year horizon, then the top five stock picks would be as follows:

Infosys and TCS: Large software companies are best placed to reap the rich rewards from the shaping of landscape of the financial sector in the West over the next couple of years.

ICICI Bank and HDFC Bank: As interest rates seem to have peaked and may come down in the next 6-9 months, these frontline banks may give handsome returns.

Rural Electrification Corporation: The company enjoys a dominant position in powersector lending. Serious players with committed targets for powersector projects means immense profit visibility. The stock is available at very attractive valuations.

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