Sombre market outlook for early part of 2011

Inflation, rate pressure and scams dampen mood, though demand remains strong.

The Indian equity market’s near-term outlook for 2011 looks gloomy, while the year as a whole

might give a moderate return of 15-20 per cent from current levels.

Market participants are worried due to rising inflation, increasing pressure on interest rates and

the repeated unearthing of scams on the financial and political front. All these have spoilt the

sentiment.

Before going up, the Bombay Stock Exchange’s benchmark Sensex might correct by five to 15

per cent. The interest rate increase by China last evening could act as a trigger for a fall when the

market here opens tomorrow.

Apart from China, analysts’ major fear is on corporate earnings, as they might go down in the

coming quarters.

In 2010 so far, the equity market (Sensex) has risen by 15.6 per cent. However, smallcap and

midcap indices have underperformed, with returns from 11 to 14 per cent and a faster correction

in the last month, reflecting the impact on small investors’ psychology. In absolute terms, 43 per

cent of stocks (of nearly 3,000 active scrips) are trading at lower levels compared to where they

were at the beginning of the year.

From November 11, when the markets peaked out, the Sensex is down 3.8 per cent, the BSE

smallcap index is down 16.8 per cent and the midcap index 12.6 per cent.

Inflation is high and food inflation has again begun raising its head. Global crude oil prices have

crossed a major barrier of $90 a barrel and according to a Barclays commodity analyst, “all

indications suggest that crude oil will trade for a sustained period above $100 during most of

2011”.

Petrol pricing reflects market rates and any rise in diesel will be inflationary; yet, if prices are not

raised, it will add to the subsidy and oil companies’ under-recovery will go up.

Pradeep Shah, chairman, IndAsia Fund Advisors said, “The economy has fundamentally peaked

out, at least for the time being.” A possible rise in interest rates will add pressure on companies’

earnings. Vikash Khemani, managing director, institutional sales, Edelweiss Capital, said: “We

see the possibility of corporate earnings downgraded for the coming quarters.”

FII sentiment

All these factors might have been conceded by investors, particularly those abroad. However,

scams have spoiled the sentiment. A combination of these factors might result in foreign

institutional investors (FIIs) paying less attention to India and certainly not paying a premium for

India over China.

new perspective

Rajesh Bhayani / Mumbai December 27, 2010, 0:04 IST