Sensex may fall 15 per cent in 2010

Withdrawal of stimulus measures and higher interest rates could derail the market.

Indian stocks may decline in 2010 after their best year since 1991 on prospects for higher interest rates, reduced stimulus measures and an outflow of investment from emerging markets, Ambit Capital said.

The benchmark Sensitive index may trade in a range of 15,000 to 19,000 this year, said Andrew Holland, chief executive officer of equities at Ambit Capital.

That’s a drop of 17 per cent at the lower end compared to its current level 17,540. The Sensex rose 81 per cent in 2009, its best year since 1991.

“It’s not going to be a great year for stock market performance and I would have a defensive portfolio in the first half as global headwinds are a cause for concern,” Holland, the former managing director for equity proprietary trading at Merrill Lynch in India, said in an interview in Mumbai. “Rising bond yields and stimulus measures being pulled out from the system is worrying.”

The rise in India’s food prices to an 11-year high is adding pressure on the central bank to lift borrowing costs after reductions between October 2008 and April 2009 helped shield Asia’s third-largest economy from the global recession. Finance Secretary Ashok Chawla said this week the extension of stimulus measures isn’t “good” for the economy and that the central bank will decide on interest rates on January 29.

Fund raising by Indian companies and the government’s divestment programme may total $25 billion this year and divert funds from existing stocks, Holland said. Indian companies raised $15 billion from share sales in the country last year. Ambit was ranked among the top 10 investment banks for mergers and acquisitions in 2008, according to Bloomberg data.

FMCG, pharma preferred
Holland said he is betting on consumer goods companies such as ITC, Nestle India and Colgate-Palmolive (India) to counter any declines in the market. He also favours information technology, retailing, insurance and drugmakers. He’s avoiding power producers because their valuations are too high, Holland said, without naming specific stocks.

Central banks in emerging markets will be the first to raise interest rates this year, Holland said. Investors may sell emerging-market equities to buy US stocks should the economy recover, said Holland.

“If the US grows at about 4 to 5 per cent, the dollar will strengthen and money will move back,” Holland said.