Indian stocks could surge if spending accelerates

Mumbai: Indian shares should extend their rally into 2010, supported by stronger corporate earnings as consumer spending accelerates on the back of an expanding economy. A recovery in major regions like the US and Europe will also help.

The consensus view is foreign investors will continue to pour their savings into faster growing economies such as India, whose $1.3 trillion (Dh4.78 trillion) economy is widely expected to head to nine per cent plus growth trajectory in 2010-12.

Foreign funds have invested about $17 billion in Indian equities in 2009, after pulling out $13.4 billion last year when the global financial crisis rattled investors and triggered a flight to the safety of bonds and gold.

The inflow has boosted the top-30 Sensex more than 70 per cent this year to around 17,000 points as investors chased bargains after the market had slumped over half in 2008.

The annual gain in the benchmark index is the best since the early 1990s and analysts believe the rise in 2010 will be moderate.

"We're up more than 100 per cent in terms of broad indices, so some degree of consolidation from here on I think is a realistic assumption," S. Naganath, president and chief investment officer at DSP BlackRock Investment Managers, told CNBC-TV18.

He predicts the Sensex will trade between 15,000 and 18,000 in the first half of 2010. This was because corporate earnings growth in the 2009-10 financial year ending March would be muted and pick up towards about a fifth in the following year.

"We'll probably see in the first half a period of consolidation, a period of range bound movement before we move up later in the second half of 2010," Naganath said.

However, smart investors would likely grab the opportunity to build their portfolio when prices come off as the outlook is firmly upbeat.

India's strength comes from its rapidly expanding middle class, roughly estimated at about 400 million — more than the population of the US.

Surge

Demand for automobiles has surged as high as 65 per cent from a year earlier and the trend is expected to remain strong.

"Our March 2011 Sensex target is 20,000," Suresh Mahadevan and Philip Wyatt, analysts at UBS Securities, said in a note to clients.

They said the market would continue to rise in 2010 as strong economic and earnings growth outlook draw in large institutional investment.

The risks for investors come from the imminent possibility of central banks beginning to haul back liquidity as inflation picks up on the back expanding economic growth.

"Inflation is the single biggest worry going into 2010," Rasesh Shah, an equity trader, said. "A rate hike is on the cards and it could stall the market rally."

He said investors would likely become more choosy and there would be a consolidation phase before building up steam for the next rally.

Economists say a modest rise in interest rates is unlikely to trigger panic and will only be a balancing act after the heavy rate cuts in the past.

The Reserve Bank of India has kept the key reverse repurchase rate unchanged at 3.25 per cent since April after slashing it six times from October 2008.

The economy grew 7.9 per cent in the September quarter, the fastest pace in 18 months, and the finance ministry has said expansion for 2009-10 could exceed 7.75 per cent — only behind China among major economies.

"Risks are high for Year One of the recovery," JPMorgan analysts led by Adrian Mowat said in a report. "In Asia, inflation is the main threat to the bull market."

Still, Mowat, the Hong Kong-based chief Asian and emerging market strategist at JPMorgan, said early 2010 conditions should continue to be very favourable for Asian equities with strong growth, positive earnings estimate revisions and an ongoing rally in credit markets.

The brokerage said it expected the MSCI index for Asia, excluding Japan, would climb to 530 by the end of 2010 from around 400 now, and just below Goldman Sachs' forecast of 540.

The global economy should grow 3.4 per cent next year, including "above consensus" expansion of 3.3 per cent in the US and 2.6 per cent in Europe, benefiting demand for the region's exports, according to the report.

Interest rates in the largest developed economies are also likely to stay unchanged next year, the brokerage said.

The writer is a journalist based in India.