Emerging Markets set to outperform Eurozone

Stock markets in India have ended FY 2009-10 on a buoyant note, and most investors have made decent money during the past one year. Infact a majority of the global markets have been on a sustained uptrend since the beginning of the year, backed by excess liquidity on the back of massive stimulus packages doled out by Central banks. What lies in store for the world markets in the next year?

There are signs of inflation crossing the safe limit stipulated by the RBI, and accordingly the Central bank has started the fiscal tightening process by raising the Repo rates. Experts feel that more tightening measures are in store in the first quarter of the next fiscal, as inflation is likely to increase till the end of June on a low base effect and supply-demand mismatch for agricultural commodities.The equity markets look fairly priced based on the fundamentals, but India and other emerging markets are likely to outperform the markets in US and the Eurozone.

The GDP growth in US and the Eurozone, on the back of stimulus packages, can at best be maintained for 2 quarters, and the second half of 2010 will see growth in these economies slip by 100-150 basis points, once the demand created by the stimulus packages runs its course. There is more trouble feared in the Eurozone on account of huge deficits in many countries, Greece seems to be only the tip of the iceberg. Japanese economy continues to falter as the Yen strengthens. The 2nd half of the year would be critical for the countries in the Eurozone and Euro as a common currency. India will continue to be a favoured destination, against the weakness in the Eurozone. But the jitters of the negative developments will be felt in our markets too. And any political instability could add fuel to fire.

In such a situation investors are advised to adopt a wait and watch strategy. Although equity investment remains the best bet in India, intermittent corrections should be made use of to enter the markets at lower levels. Currently our equity markets seem overheated, although they may attain new two year highs in the near future. Buying for long term can be considered when panic sets in due to any of the factors mentioned above coming into play. Overall, Indian economy is likely to outperform developed world economies in the next 2-3 years.

Unique ID Project: India on the threshold of another IT revolution

Unique Identification Authority of India (UIDAI), established in February 2009 promises to become the harbinger of another IT revolution in India. The authority, headed by Nandan Nilekani, aims to provide a unique number to all Indian nationals based on a biometric database. The major advantages of the UID numbers will be:

• Promoting 'Financial inclusion' through smooth distribution of subsidies and grants under the poverty alieviation programmes such as NREGA
• Conducting free and fair elections, sans rigging
• Controlling illegal immigration into India
• Combatting  terrorist activities on our soil.

The estimated cost of providing a unique identity to Indian citizens is expected to cost US $ 6 billion (Rs.30,000 crores). The first phase of its implementation is likely to create business opportunities worth over Rs.6,500 crores. The finance minister has provided Rs.1,900 crores for this prestigious project in budget 2010-11. Top IT vendors including Infosys, TCS, Wipro, IBM, Accenture, Mastek, Mindtree, Siemens, Mahindra Satyam and Logica have been initially shortlisted for the UID project. This will be followed by technical evaluation of these vendors. 'Ernst & Young' has been appointed as consultant to the project. The project will be a major milestone for India's Rs.66,000 crore domestic IT market.

The gigantic proportion of IT spending envisaged through the project will give a major boost to the revenues of Indian IT industry. The learning generated through the implementation of the project will help these companies to tap the market for such project around the globe. Evaluation of this project and the vendors associated with its implementation, augers very well for the bottomline of these companies. Investors are advised to have a decent exposure to the domestic IT sector to reap the benefits of the second IT revolution in the world, this time led from the front by India.

Eqiuty Markets give a thumbs up to budget 2010-11

Of the past 19 budgets presented in India, bears were leading the bulls by a whisker 10-9 (i.e, the equity markets had fallen 10 out of 19 times immediately after the budget was presented). However, the response of the market to Pranab Mukherjee’s Budget 2010-11 has helped bulls draw level. Both Sensex and the Nifty made handsome gains immediately after presentation of the budget. The gains have continued to grow during the two weeks post budget presentation. The consistent run up since the budget, has some investors worried. How long can this bull run last?

Although, the long term trend for our equity markets is definitely up, because of the spectacular turn-around in the fortunes of the Indian economy after a brief slowdown. If the recent economic data is an indication, the economy is firing on all cylinders, and might surprise us with a GDP growth of well over 7% in 2009-10. The budget has given a booster dose to the India growth story with consumption oriented incentives. In the short run, some of the budgetary measures may seem to be inflationary, but removal of supply side bottlenecks will ensure easing of the inflationary pressures from the 2nd quarter of fiscal 2010-11.

The post budget bull run is driven by FII investments, FII's have pumped in over Rs.10,000 crores in the equity markets since presentation of the budget. But domestic institutions and retail investors have been booking profits in this bull run. Two major factors that need to be watched by investors for sustainance of the current bull run are:

• Strengthening Rupee: The rupee which was trading around 46.50 to a dollar before budget closed at 45.45 on Friday 12th March. Analysts expect the rupee to remain firm during the current month. January industrial growth at 16.7%, and the marked improvement in exports augers well for the stregthening rupee.
• Falling VIX: The Nifty VIX, which measures the immediate expected volatility of Nifty, closed at 19.73 on friday 12th March, its lowest closing since its launch on November 1, 2007. The VIX breaking down below 20 is likely to trigger a further upside in the NIfty.

Investors are cautioned to watch these two key indicators closely, and any reversal in any or both should be taken as a cue to trim your positions in the equity markets. After all, it is not a bad idea to take some profits home as the old proverb says 'Make hay while the sun is shining'.