Tracking a Positive Theme

The previous year was riddled with scams and controversies—the Indian Premier League scandal, the Commonwealth Games mismanagement, the 2G telecom licence scam and stock price rigging. Of course, some of the issues don’t impact the stock markets. Nevertheless, it hasn’t been a very good year. So, where do equities go from here?

The Indian system is plagued with widespread corruption. Seasoned investors in the Indian equities are aware of the deep-rooted problem and term it as ‘the cost of doing business’. The recent scams could hurt the investment sentiment temporarily, but they are unlikely to have a long-term impact.

Foreign institutional investment flow is an important factor for equities. As the Indian equity markets have been rising since September 2010, it is not surprising to see a correction. India is trading at a premium to other emerging markets, which may result in a temporary country-wise shift in allocations. FIIs may exit the Indian markets, especially when the rupee is looking weak. However, the inflow will remain strong in 2011.

The Indian economy is expected to grow at 8-9%. In fact, the country offers growth visibility for two years, something that many Asian economies don’t. It also has a sufficiently large number of large-cap companies to invest in. More publicsector disinvestments will add quality companies to the list. Besides, the rupee is expected to appreciate by 5% against the dollar. If anything, one should be concerned about foreign direct investment flows, not the foreign institutional investment.

In 2011, equities will have to contend with rising commodity prices(although a slowing China will provide some relief). This will trigger inflationary trends, threaten to widen the current account deficit and fiscal deficit, and force monetary tightening. The PIIGS (Portugal, Italy, Ireland, Greece and Spain) economies will also need debt restructuring, but overall, the positives outweigh the negatives.

Over the next few months, the stock movement will be dictated by the focus on good governance, execution record and positive cash flow. Invariably, the large-caps and a select list of mid-caps will perform well. Investors should also diversify their portfolios by investing 5% in gold.

Among the broader themes, the consumption- and agriculture-related space is likely to continue with good performance. The rising per capita income, substantial wage hikes, a good monsoon, rise in minimum support prices for crops and the rural job guarantee scheme will continue to boost consumption. The agriculture sector, which is witnessing a rise in the gross fixed capital formation share of the gross domestic product, may be a swing factor.

Integrated metal players and pure EPC (engineering, procurement and construction) companies are set to benefit. The information technology sector, which will witness an increase in discretionary spending by its customers, is ripe for investment.

The Nifty can range between 5,450 points on the lower side and 7,000-plus on the upside in 2011-12.