2010 is a watershed year for the investors’ community in many ways. India regained the high growth rate, monsoon was plenty to spread cheer, auto sector saw huge growth, and stock market touched the same all time high of 2008. Quantitative easing in US started in 2010 and its impact will be felt only in 2011.
In the backdrop of these events, we will discuss the investment options available to the investors in the year 2011.
Investment options and trend in 2011
Based on our observation of the market, macroeconomics, and broader indices, we will take a look at the following available options in the market.
Government and Corporate Bonds
Government bonds and schemes will be, as usual, risk free and low return instruments. The corporate bonds will give a better return than Government bonds. Government will issue more bonds in 2011 to support infrastructure building. This will create another avenue for investors.
Corporates will also come up with bonds in infrastructure space and investors may use the opportunity to invest in high grade bonds to achieve healthy returns.
Government is toying with the idea of introducing inflation indexed bonds. If this happens, it will be good for investors to beat inflation to some extent.
Investing in equities and equity based diversified mutual fund
Stock market has experienced good run in 2010. The market is very close to the peak of 2008. It has given a return of about 17% in 2010. The year 2011 may see a buoyant market riding on the high growth and overall good global economic outlook.
There could be positive impact of quantitative easing, popularly known as QE2, by United States. The money may flow to the emerging markets. Since India doesn’t have capital flow control in place, there is high probability that the QE2 money will flow to India most among the emerging market and may create bubble.
Mutual funds have seen liquidation in the second half of the year 2010. There could be fresh buying in the coming year. The investors can invest in a well-diversified mutual fund to mitigate the risk of individual stocks. They can also look at mutual funds targeted at specific sectors mentioned below.
Sectors to watch out for:
Banking sectors: With India’s growth stabilizing to a respectable level at 9%-10%, the banking sector will perform better.
Power Sector: With the increasing growth and economy, India will need humongous power to energise its industries and infrastructure building. Moreover, the national electricity policy envisages electricity for all by 2012. This gives immense opportunity for investors to take part in power sector story.
Agriculture Sector: Agriculture has potential to create immense wealth because of huge demand for food and agriculture produce. There will also be increased emphasis on food processing. This will be a great sector for investment in 2011 and beyond.
Infrastructure: This sector has got enormous boost in Government’s planning with the declaration of $1 trillion investment in next decade. Investors may look at infrastructure sector for long term gain.
Possible risk factor:
Prompt and timely execution of projects are very important to create value for the investors. There are experts who are betting for developed economy in 2011 compared to emerging ones. If this happens, there will be capital outflow from FIIs to the developed economy and it may slow down our growth.
Gold & Silver
With quantitative easing measures by US, there will be glut of dollar in emerging market depreciating its value. The prices of Gold may rise as a result of weakening of dollar. Moreover, the low interest rate at US and Europe will further add to the sheen of Gold. Gold can be a good investment in 2011.
Silver has given great returns in last 5 years and the rally should continue in the year 2011 as the industrial use of Silver will keep going up.
Global investors, Mark Mobius and Jim Rogers, are optimistic about precious metals for the year 2011 and beyond.
Possible risk factor:
The assumption is based on weakening of dollar. However, if developed economy outperforms emerging markets in 2011, dollar value will appreciate and Gold may go down. Additionally the precious metals have very high correlation among one another. The other risk is interest rate in developed economies. If the rate rises, the Gold prices may go down.
Other options
There are other possible options such as ULIP, real estate, and pharmaceuticals. However, investors are advised to invest them through good mutual fund as the risk is diversified.