Expect 2011 to be year of below-average returns.
As yet another year of chaotic movements on the indices nears its end, experts have been debating on how 2011 would pan out to be. Prabhat Awasthi head of equity research and managing director of Nomura Financial Advisory and Securities India operations expects 2011 to be below-average year for equities. He sets a December-2011 Sensex target at 22,100, thus implying a potential return of around 12%.
Having a defensive stance on stocks and sectors Awasthi tells CNBC-TV18s Udayan Mukherjee and Sonia Shenoy that telecom will experience a slowdown in the investment cycle. He is also underweight on banks and autos and says higher royalty burden is negative for minority shareholders in Hero Honda.
There are two-three things. One is that we are getting concerned about inflation again. There are two components. One is that we were all expecting prices of agricultural commodities to fall post monsoon, we had a great monsoon. And suddenly we have seen a fair amount of buoyancy in those prices, even though typically Indian prices have not followed global agricultural commodity cycles, but this time around there has obviously been a very sharp movement even despite very good monsoons. That is one concern, which is a reason.
Secondly, on global commodities again, you have seen crude close to USD 90 per barrel now, copper is close to its all time high. So, this was the risk, which always existed in India in terms of inflation risk, which is important to India. If put together the agriculture that will put pressure on policy because end of the day wage pressures in India anyways have been fairly strong, add to that commodity price pressures we have an inflationary issue.
Secondly, we think that because of the tightness in the monetary policy there will be some impact in growth. So, we have cut down our growth forecast not substantially, but there is a directional change on downwards. We also think that because what is happening on the policy front, sectors such as telecom etc will have a slowdown in investment cycle which should also have an impact on growth rates, atleast in the near-term on the investment cycle.
Thirdly, I think there is a global reason, our global strategists have cut down, we have basically gone fairly underweight on emerging markets and that essentially also gives you our thinking in terms of where the money flows will be. So, if you put it all together, fundamentally we think basically a combination of the fact that inflation will be higher and growth a bit subdued compare to where we were earlier along with the fact that the global markets or the developed markets are looking fairly attractive.
We essentially think that there will be no reason for the market to rerate up. There will be some risk to earnings because of the tightening and higher oil prices. So, net-net, basically that leaves you with, even the best case, probably 12-13% returns.
