Investment outlook for 2010

Do you expect the stock market to do better in 2010 than in 2009?

Eight out of nine experts say 'No'.

John Praveen: No. The Sensex will rise and it could touch 22,000 by December 2010, but the increase may not be as much as in the past one year. This is because the valuations now are not as compelling as they were, say, around March 2009. Also, we are now running into prospects of interest rate hikes.

Motilal Oswal: Yes. Corporate profits in the next two quarters will rise dramatically due to the base year effect coming into play, prompting the analyst estimates to move in the northward direction. The broad indices then will start looking cheap on the future performance and the new flow of money would push the market up.

Ashu Madan: No. 2010 will be a year of consolidation…as most of the positives are already in place and no fresh trigger is visible for another startling performance.

Rajnish Narula: No. The excess liquidity due to easy monetary policies across the globe will slowly be withdrawn in 2010 as growth returns everywhere. This might curb the performance of the markets. Year 2010 will also see a large supply of paper ($33-40 billion) in the coming few months from private Indian companies and government disinvestment in India, which should result in the market being rangebound.

Vikram Kotak: No. Markets are no longer undervalued, and likely to consolidate and give healthy 15-20 per cent returns.

Nandan Chakraborty: No. But individual stocks will perform better . 2010 will be a stock picker's year. Sandesh Kirkire: No. The market got re-rated in the current calendar due to an improving economy and a clear political verdict. The same may not happen in 2010.

Nilesh Shah: No. 2009 was a bumper year for investors but 2010 will have a very low probability of repeating the market performance.

A. Balasubramanian: No. However, overall buoyancy will remain due to improving top lines and improvements in macro factors.

Will large caps do better in 2010 than in 2009?

Six out of nine experts say 'No'.

Praveen: Yes. Sectors like auto and white goods, infrastructure, IT and health care are expected to do well in 2010 on the back of a stronger consumer spending. In all these sectors there are big players who are expected to do better than others.

Oswal: Yes. Since exchange traded funds (ETFs) are not yet very popular in India, when the broader economy accelerates, money will begin to flow into passive fund management. As passive fund management buys the broad indices top down, so the initial flows would come in large caps.

Madan: No.

Narula: No. However, they will deliver a positive performance.

Kotak: No. Most of the large-cap stocks have run up over 70 per cent since March 2009 and are currently fairly valued. But by and large, the large caps will continue to deliver in terms of earnings and growth with an improving economy.

Chakraborty: No. But individual stocks may do better in 2010.

Kirkire: No.

Shah: Yes, but on a risk-adjusted basis. We expect 2010 to be a year of stock picking rather than sector call. Some of the large cap stocks have underperformed the market significantly and could take the lead, as factors impacting their sectors start improving.

Balasubramanian: Yes. 2010 will see stock-specific outperformance, and large caps will do better due to expected earnings growth.

Will mid-caps do better in 2010 than in 2009?

Five out of nine experts say 'No'.

Praveen: No. Because in terms of valuations, the mid-caps look less attractive than the large caps today.

Oswal: Yes. When the market starts moving towards maturity, people start migrating from passive fund management to active fund managers, who are well-versed with the bottomup approach. In this phase, people buy stocks based on compelling stories or valuation arbitrage.

Madan: No. But if the market consolidates, the mid-caps will outperform the large caps.

Narula: No. But mid-caps will be able to give a positive performance. Kotak: No. Their valuations are not as compelling as they were in 2008.

Chakraborty: Yes. Mid-caps do well when the GDP grows, as they are nimbler in exploiting the demand-supply gaps that arise due to faster growth.

Kirkire: Yes. With the markets having got re-rated in 2009, the mid-caps would continue to improve their earnings growth in 2010 in line with the growing economy.

Shah: No. The mid-caps are trading at a reasonable spread to the large caps. The valuation gap should hover around the same level. Thus, earnings will drive the stock performance.

Balasubramanian: Yes. The probability of mid-caps outperforming relative to 2009 is higher.

Will small caps do better in 2010 than in 2009?

Four out of eight experts say 'Yes'.

Praveen: No.

Oswal: Yes. The small caps are generally the beneficiaries of euphoria in the economy and the stock markets. A high tide lifts all boats.

Madan: No. People have seen how the maximum losses occur in small caps, and with every downturn, a few of them vanish for good.

Narula: No, but small caps will otherwise do well.

Kotak: Yes. Small cap valuations have to catch up, as the valuation gap between large and small caps is still below the last 10 years' mean.

Kirkire: Yes. With economic recovery in fast forward mode, small caps will be able to establish higher growth than in 2009.

Shah: No. In the months ahead, liquidity will reduce, rates can rise, stimulus will get withdrawn and inflation could become a serious issue. Small caps tend to suffer the most in such a scenario.

Balasubramanian: Yes. Small and midcaps will do better from a returns point of view in 2010.

Will equity funds do better in the next three years than in the past three?

Eight out of nine experts say 'Yes'.

Balasubramanian: Yes. They are likely to have a good, consistent performance over the next two years thanks to improvements in global and Indian financial market conditions. Further, reforms in banking, financial services and insurance could lead to further gains in the equity market apart from increased interest in the Indian market by foreign investors.

Oswal: Yes. In India the savings rate is very high while the proportion of savings coming into equity through any route is very small. Mutual funds are the first choice of layman money coming into equity.

Narula: Yes. India is slated to achieve a nominal GDP growth rate of about 12-14 per cent in the coming years, which should translate to a stock market performance of 15-18 per cent. With active money management and stock picking by the diversified equity funds, stock market performance can be bettered or matched.

Kotak: No. Despite the crash in 2008, average performance of equity funds over the 3-year period remains about 35 per cent. From here on, they will deliver a return of 20-25 per cent.

Chakraborty: Yes. Improving liquidity and growth environment in the developed world coupled with economic growth in a scenario of low interest rates domestically should be conducive for equity funds as an asset class in the years to come.

Kirkire: Yes. Because of the market meltdown in 2008, the performance of equity funds in the past three years has been severely affected. The markets would deliver superior performance in the next three years.

Shah: Yes. We expect equity funds to do well in 2010-2012 over what they have done in 2007-2009. In some sense it was only the returns from 2007 that we have earned, as the loss of 2008 was covered in 2009.

Balasubramanian: Yes.

Krishnamurthy Vijayan: Yes. Every market has its highs and lows and equity funds over the next three years will reflect this phenomenon. To combat this, the best option is to invest through SIP (systematic investment plan) and ride the highs and lows of the market with relative ease.

Will debt funds do better in the next three years than in the past three?

Seven out of nine experts say 'No'.

Praveen: No. Typically, when you see strong GDP growth coupled with inflationary expectations and changing interest rate expectations, bond yields keep rising and bond prices fall. Such an environment is not one where debt funds do well.

Oswal: No. It will be so because of the passion for equity and also because people generally prefer bank fixed deposits due to the proximity and easiness of investing.

Narula: No. The average returns of debt funds in the last three years is around 10 per cent and in the coming three years the returns could be 7-8 per cent depending on the macroeconomic conditions and policy actions.

Vijayan: Yes. In the next few quarters, short-term debt funds will perform well as we expect the interest rate cycle to move up. By 2011, income funds will be the best investment bet because of reduced government borrowing due to fiscal consolidation.

Kotak: No.

Chakraborty: No. Duration products like Income & Gilt Funds have delivered an average CAGR of about 7.2 per cent, but the return has been more cyclical. Even though we believe that these funds would be able to generate better returns over the next 3 years, timing would hold the key as one could see huge volatility.

Kirkire: No.

Shah: No. It is difficult to predict debt fund performance, as rate cycles are becoming shorter and sharper and hence a lot difficult to forecast.

Balasubramanian: Yes. On a three-year basis long-term equity and gilt funds can give better returns. Debt fund managers are now more conscious of the interest rate volatility. At the same time, hybrid funds like monthly income plans and balanced funds can also be considered.

Where do you expect property prices to be in 2010?

All five experts are betting on a 0-10 per cent increase in prices over 2009.

Praveen: 0-10 per cent increase, depending on location. The housing market has begun to stabilise, not just in India but globally. Moreover, in the Indian context, with rising population, rising incomes and rising wealth, there will be a clear demand for more housing.

Oswal: 0-10 per cent increase, depending on location. I believe even real estate will be a beneficiary of the improved economic environment and stock market exuberance.

Narula: 0-10 per cent increase, depending on location. Real estate prices will continue to surge higher in 2010 as the economy limps back to normalcy. This revival would encourage many investors who have been waiting on the sidelines to invest. Also, the withdrawal of the 'Easy Money' policy would not have any immediate effect on the liquidity situation. Specifically in India, the demand-supply mismatch in the housing sector will also lead to a rise in prices.

Vijayan: 0-10 per cent increase, depending on location. The prevailing trend of rising prices, which is largely due to the improving economic climate and resurgent middle income end-user demand is, as of now, more developer-and-project-specific as opposed to a general market trend…As the real estate sector continues its emergence from the woes of FY 08-09, prices need to be realistically aligned with demand sentiments. Significant infrastructure initiatives around the country will open up new markets and alleviate the upward pressure that congestion exerts on prices.

Kotak: 0-10 per cent increase, depending on location. Increasing focus on affordable housing has resulted in the launch of several low-cost housing which will spur demand. With improving economic outlook, greater job security will also foster demand leading to an upside in real estate prices. Further, in 2008, given the bearish outlook, people held back their real estate investment, resulting in ample pent-up demand.

Where will gold prices be in 2010?

Four out of eight experts see gold prices rising by 5-10 per cent, while three expect a 5-10 per cent fall.

Praveen: Remain around the 2009 level. Gold normally does well when inflation is rising or when people are risk-averse. Now, with risk aversion having come down and investors willing to look at other asset classes, we may not see the trend of increasing prices. But we will also not see it decline because there is going to be some global demand.

Oswal: Fall between 5-10 per cent. The recovery in the US economy will see the US dollar getting stronger. And since commodities prices move in an inverse proportion to the dollar, gold prices are expected to fall. Also, the global economic recovery will make gold a less preferred asset class.

Jayant Manglik: Fall between 5-10 per cent. Four factors that are likely to drag down international gold prices in 2010 are: A stronger US dollar against major currencies like the Euro; higher global interest rates; low inflation and; revival of other markets like equities and real estate. At least three of these four factors are a near certainty in 2010.

Narula: Rise between 5-10 per cent. Investors the world over are looking for an alternative to the dollar. Central bankers are also sizing up their gold reserves which will lead to a continuous demand from across the world. Matching this demand with supply is going to be difficult as gold production over the years has been coming down and newer discoveries are becoming increasingly rare.

Vijayan: Rise between 5-10 per cent. One could invest in the commodity directly, or invest through gold ETFs. ETFs give an investor a cheap investment into a basket of index securities. It does not carry fund management risk and it is a proxy for the "market" which is often a great psychological comfort to the retail investor.

Kotak: Rise between 5-10 per cent. Gold prices will be bolstered by continued weakness in the US dollar. Further, we will continue to see increase in asset allocation towards gold as investors continue to buy gold. We have seen that inflows into gold ETFs have been very strong. With central banks in emerging markets increasing their gold reserves, demand for gold has got a boost.

Chakraborty: Fall between 5-10 per cent. As the global economy recovers, the US dollar may rise affecting the demand and price of gold. Dilip Bhatia: Rise between 5-10 per cent. In the last two years, gold prices in India surged by Rs 2,000 annually and it has the potential to touch Rs 20,000 by next year. A depreciating Indian rupee will support an upward rally in gold. Further, economic instability and crises across the world will make gold a safe investment bet.

— Virendra Verma, Rachna M. Koppikar, Manu Kaushik and E. Kumar Sharma