Stock market – What to expect in 2011

By | January 4, 2011

As on Dec 29, 2010, the Sensex ended up at 20256 and nifty ended up at 6060! Go back to Dec 29, 2009; the indices were at 17,401 and 5187 for sensex and nifty respectively. So what’s your bet for 2011? In 2009 the market was in recovery mode which consolidated in 2010 and expectedly market will show a healthy return with strong fundamentals. Let’s have a look at the past performance of Indian equity market and the key drivers which will be essential for stock picking going ahead in 2011.

Indian Equity Market Performance in 2010

Though fundamentals were strong with the economy growing at a rate of 8.9% in the first three quarters of 2010, the stock market didn’t quite outperform as compared to its peer.

However If you had invested in sectors like Consumer durables, FMCG, healthcare, Banking, Auto and IT then you would have easily earned healthy returns. This high return can be attributed to the rise in consumer demand in India over the last three quarters primarily driven by a recovering economy. It can also be attributed to the rise in purchasing power driven by higher disposable income because of government initiatives like tax cuts, higher rural spending etc. Stocks from fast moving consumer goods (FMCG) and consumer durables are trading at all time highs. Metals were highly volatile this year and Oil & Gas BSE indices didn’t yield much return.

Indices 1 year return As on 29th Dec 2009
BSE FMCG SECTOR 29.30% 3656.02
BSE BANKEX 31.60% 13167.19
BSE Auto 36.60% 10054.29
BSE CAPITAL GOODS 8.30% 15223.49
BSE CONSUMER DUR. 68.70% 6229.08
BSE FMCG 29.30% 3656.02
BSE IT 31.40% 6757.47
BSE Oil & Gas 1.30% 10559.89
BSE Metal -0.90% 17339.21
BSE-SMALLCAP INDEX 15.80% 9511.24
BSE-MIDCAP INDEX 14.70% 7658.45

The mid-cap and small caps track the performance of companies with market capitalization a fifth or tenth of blue chip firms. They are usually considered to be high yielding stocks however 2010 was not a year to take a call on these stocks. Last year the Mid caps and small caps garnered a return just comparable to the sensex returns over the past 1 year which is way below the expectations.

Until November, mid caps were performing well and giving fairly good returns to the investors. However, a string of scams and stock rigging issues jolted the confidence of investors. This resulted in resorting to booking bookings which brought down the stock prices of many mid caps and small caps. A decrease of 12.32 per cent and 19.20 per cent in the mid-cap and small cap index from Nov 11 to Dec 16 was the primary reason for offsetting the gains in the rest of the year. Also, there was anticipation that regulators might crackdown on stock market operators named in the purported IB report

Stock Market outlook for 2011

Past performances never guarantee future returns and hence you should perform due diligence before investing in any particular stock or sector. Looking at the broader market analysts are expecting 15-18% rise in corporate earnings in FY2011. However if the inflation continues to move up and consequently RBI hikes the interest rates by another 75-100 bps then it might be a dampener for the market going forward in 2011. Along with the inflationary pressures the oil prices hike (around $90 per barrel) can also act as an impediment to the earnings growth in 2011. These are the few sectors you should look out for in 2011.

The Indian IT and technology sector is expected to do well in 2011 as the technology spend is going to move up. Also US economy is doing well, rupee is not much appreciating. Hence, it is expected that volume growth could be range in 18-22%.

Though Mid cap has dipped a lot since November, it might be a good time to relook a few stocks for 2011. But you need to be selective enough to pick those.

Auto Sector did well in 2010 and the trend is expected to continue even in 2011.The performance of Auto sector in 2011 is expected to be in line with market. Maruti is doing well in terms of its capacity utilization. TATA motors are doing well in Europe and other countries. However an increase in steel & copper prices along with the risk of interest rates moving up can be a dampener.

Infrastructure though underperformed in 2010 because of numerous issues like delays in approvals and land acquisitions, it is not expected to do so the same in 2011. As the government has envisaged revamping the infrastructure, this sector specially the power and road sector might do well in 2011.

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