The markets is no mood to correct and Bulls have taken total control of the same. Here is Nomura’s Expectations from Indian Equities for 2010.
Growth: The 2H FY09 (fiscal year-ending 31 March, 2009) saw demand reeled in. Expect better growth in FY11F, underpinned by a turn in the investment cycle. Firm signs of a demand recovery are evident. Capacity shortages that had been masked by absent demand are now back to the fore, creating conditions for a capex revival.
Managing the Fiscal Deficit:
The government stepped up and infused risk-capital into the economy post-crisis when the private sector was in de-leveraging mode. Expect strong growth this year and expect FY11F to move towards consolidation of government finances as a pick-up in revenues is augmented by slowing expenditure, a tapering-off of extraordinary items and a move towards disinvestment.
Inflation and Monetary Outlook: The market will have to navigate the proverbial puddle of inflation in the short term. Long domestic cyclicals to play growth, but short rate-sensitives until inflation overhang abates.
CAPEX Vs DEMAND:
Domestic production was unable to meet demand in FY08, causing capacity utilisation to peak, industrial production to drop and imports to rise. Stalled financial closures of many big power projects have completed since March 2009. A renewal in capex will translate into higher capital inflows, with implications for monetary policy and the rupee
Strong capital flows and an appreciating rupee:
The high tide of capex will draw capital inflows as poor disintermediation of savings (underdeveloped long-end corporate bond market and comparatively low level of savings via equity) implies increasing external inflows to finance long-term capex. This will have implications for monetary policy and the rupee. Expect Indian rupee/US dollar to touch 42.3 by end-2010F.
Return of Leveraging Saga:
Re-leveraging in 2010 is a key theme, following as it does de-leveraging by corporates and households; the government had to leverage up as it administered fiscal stimulus.
Finally on SENSEX Target – Bullish on a one-year horizon. While valuations do not seem frothy they remain vulnerable to excessive inflation and ensuing monetary tightening. See a correction of some 10% as offering a more attractive entry point into a solid growth story. We revise our Sensex target from 18,800 for September end to 19,600 for December-end 2010F. New target implies ~13% upside.