Wednesday, January 6, 2010

>Time to glide after the stride (ICICI DIRECT)

Equities — The asset class to be in
Equity as an asset class has outperformed other asset classes including gold in CY09. The outperformance also sustained over a longer period of time as can be seen from the exhibits below. Emerging equity markets have outpaced their developed counterparts in the last 10 years since 2001, indicating growing importance of developing economies as a preferred
investment destination.
Commodities, as represented by Reuters/Jefferies CRB Index, have performed well in phases but huge volatility makes them less attractive visà- vis equities over a long period of time.

Investor’s dilemma in 2010
The year 2010 would be a litmus test for the markets after we witnessed one of the best calendar year returns of all times, surprising us all. Investing was easy in 2009 with markets rewarding a basket of asset classes. Year 2010 would be different in this regard, where an investor would need to choose the right asset class and of equally sound quality. At the same time, the return expectation needs to be moderated as a repeat of 2009 is unlikely.

Choosing an asset class in 2010 will become even more difficult when the global economy still throwing conflicting signals about the intensity of recovery. An investor would be facing major dilemmas and this noise is going to get even louder when we have lower liquidity, going forward. Some of the major predicament an investor could face would be whether
the market would rally further and how emerging markets are likely to perform on that scale? Would there be tightening of money supply and could we face a double dip? or is Chinese growth for real? Even domestic factors like higher inflation, economic growth and efficacy of the government’s role would create impediments in the minds of an investor.
We try to asses these factors and hope to bring clarity on the same.

Emerging markets to lead the global recovery…
Global economies, despite some concerns have been on the recovery path for sometime now backed mainly by sustaining manufacturing activities, improvement in inventory cycle, rising home sales, etc. The International Monetary Fund (IMF) has revised upward the global growth prospect with ~3% growth in 2010 following a contraction of ~1% in 2009. During 2010- 14 the growth is forecast to be ~4%, below the average of ~5% just before
the financial crisis.

However, the pace of recovery is faster in emerging economies. Still, the stronger domestic demand helped these countries to replace the export dependence to a large extent. This, in turn, helped them to come out of the recession at a faster rate compared to the developed countries. The IMF has upgraded China’s GDP growth prospect again with the current forecast of 9% growth for 2010. On the other hand, however, India’s growth forecast has been downgraded marginally to 6.4% for the same period. We believe this is because of the adverse effects of the poor monsoon in the country.

Share of developing economies in total GDP to improve…
It is clear that the importance of emerging economies would improve, going ahead, in the global economic arena. The balance of power is also likely to shift towards emerging countries, as the share of emerging economies to the total world GDP is rising steadily.

Whether out performance by emerging markets will continue?

To read the full report: MARKET STRATEGY