Equities in 2011: A tale of two halves

Crisil Equities expects 2011 to be a tale of two halves for the Indian market. The first half will continue to feel the impact of high inflation, high crude prices, tight monetary policies and political uneasiness given the recent events. However, in the second half, these issues are likely to soften. Further, stable GDP growth and a robust corporate performance will aid a buoyant market performance. Overall, we expect returns of 13-15 per cent from the equity markets with the S&P CNX NIFTY (Nifty) at 6,800-6,950 levels (Sensex 22,700-23,200).

After a strong recovery in 2009, 2010 was a year of consolidation for the Indian market, with a fair share of ups and downs. Quantitative easing by the US government ensured money chasing emerging markets, with India a key beneficiary witnessing record Foreign Institutional Inflows of Rs 1.3 trillion, of which Rs 1 trillion came in the second half of 2010. Also, sectors like auto and Information Technology saw strong growth momentum and supported the markets. But, in the second half the market was tested by 2G and real-estate scams, global concerns over the European sovereign debt crisis and rising inflation in China. Overall, Nifty outperformed most emerging markets, but marginally underperformed developed market contemporaries like the Nasdaq.

In 2011, India is expected to register GDP growth of 8.25-8.5 per cent, riding on strong domestic consumption. Disposable income is expected to remain strong, both in urban and rural areas. Urban income will increase on account of salary rises after a gap of two years, especially in the Information Technology and financial services. Rural incomes will rise due to schemes like Nrega and a higher expected payout from high food prices.

Despite recent outflows, we believe FII flows will remain strong in 2011 with the government likely to continue with its disinvestment programme and the expectation of a strong corporate performance in the second half. We do not see the global economic scenario having any major impact on the markets.

While the strong GDP growth and domestic consumption will continue to provide buoyancy, we expect strong headwinds, especially on the inflation front, and due to rising commodity prices. While we believe that the current crude prices are not sustainable, a delayed cooling off may fuel inflation and lead to subsequent monetary tightening by the government. We expect these factors to play out by the first half of the year.

Overall, we expect 2011 to be a year of moderate returns compared to the strong gains seen in the current bull run. We expect Nifty to trade at 6,800-6,950 (Sensex 22,700-23,200). We believe banking, IT and auto will continue to deliver strong returns as seen in 2010 but remain negative on real estate. We are neutral on telecom and infrastructure.

The author is director-Capital Markets, Crisil Research