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.