Undeterred by the rise in the current account deficit to a historic high at 4.1% of GDP, the Sensex soared to a seven-week high on Monday ending the day at 20,561. Foreign Institutional Investors (FIIs) who shopped for stocks worth a record $29.3 billion in 2010, and were instrumental in driving up the markets to new highs, were buyers once again in the year?s first trading session. The Indian market posted a dollar-adjusted return of close to 18.5% last year, better than that posted by the MSCI Asia Pacific (ex-Japan) of 15.02%.
But few strategists are predicting a big year for the Indian markets given the not-so-conducive macroenvironment, in which inflation is expected to remain sticky prompting the central bank to hike interest rates by at least 75 basis points over the next 12 months. That?s despite the fact that the markets have remained resilient in the last six months despite the central bank havign continuously tightened monetary policy.
Indeed the consensus is that 2011 will be a year of below-average returns for Indian equities. Corporate earnings, analysts say, could be pressured somewhat by wage pressures, tight liquidity, rising commodity prices, with costs rising faster than they have in the last couple of years. ?We set our December 2011 Sensex target at 22,100, implying a potential return of around 12%. At the same time we think the policy environment will tighten more than expected, restricting premium expansion for equities,?observes Nomura in a recent report.
Moreover, there are concerns on the political front too with elections to be held in a couple of key states. However, a key reason for the tempered expectations, is that India remains an expensive market, trading as it does, at a multiple just under16 times the forward 12-months earnings compared with its historical average of 14.8 times. India is also way more expensive than regional peers such as Taiwan, Korea.
Meanwhile. with several players not having returned to the market from their holidays, the turnover in the markets on Monday was thin and way below the averages for the last six months. For instance, the cash turnover on the National Stock Exchange (NSE) stood at Rs 10,738 crore compared with the daily six-month average of Rs 15,010 crore.
On the NSE derivatives sement too, the turnover at Rs 62,430 crore was far below the average six-month daily turnover of Rs 1,14,076 crore. The breadth was favourable at a ratio of 2:1 in favour of advances.