In continuing our coverage on Views and Strategies for 2010, we present Hong Kong based Institutional Investor, CLSA’s Views. It expects 14% return for the market in 2010, as pick-up in the investment cycle and global recovery drive the next leg of earnings upgrades. Q1 of Calendar Year 2010 is likely to be choppy, on revival of macro concerns like inflation, monetary and fiscal tightening and the large pipeline of pending equity issuances; autos, property and power look most vulnerable.
Super 2009 doesn’t preclude a healthy return in 2010:
Of the six instances of +50% annual return during the past three decades, only two – 1986 (-0.9%) and 2000 (-21%) saw negative returns in the following year. Accelerating GDP growth and earnings recovery can offset pressures from monetary tightening, as seen in 2004.
Q1 Volatile and Choppy:
With the revival of macro concerns on inflation, monetary and fiscal tightening and a lull in the earnings upgrade cycle, markets can be quite volatile in 1Q. CLSA see rising WPI inflation in 1Q leading to CRR, reverse repo rate hikes. A +US$10bn equity pipeline, excluding targeted US $3bn of government disinvestment, will also weigh on performance in 1Q.
Next leg of recovery will also unfold:
The recovery in consumption is on track and will be supported by improving hiring trends. Investment growth has, however, lagged. With over 70% of Sensex earnings linked to investment upturn and global recovery, the earnings upgrade cycle should resume in FY11.
Sensex Targets and Picks:
The 12m target for the Sensex is 19,250; with the expected rise in risk free rates, they do not see prospects for re-rating of the current P/B multiple. Industrials, IT and materials which play into the second leg of the recovery are key OVERWEIGHTS; Consumer discretionary (Autos), Power and Energy key UNDERWEIGHTS.
However, do not forget the SENSEX Earnings [Exclusive Coverage] to take into account before arriving at your own investment decision. Note Historical Forward P/E of SENSEX is 14.8 ~15.