Back with a bang!

A year ago, the scene on the Dalal Street was strikingly contrary. Where the start of 2009 was quite grim with all the signals on the domestic and global front staying negative, the year 2010 started on a positive note with the BSE Sensex trading at its 52-week high. Whereas in 2009 the prime concern was economic recovery and that happened mainly because of the concerted efforts of the major central banks that infused trillions of dollars in their respective economies, year 2010 will be more of sustaining the recovery that we have witnessed over the last few quarters. With favourable conditions for the markets and the economy turning around (reversing of the interest rate cycle, rising inflation, withdrawal of stimulus etc), all depends on how good are the financials posted by the India Inc. And this will decide the fate of investors in 2010.

In 2009, the BSE Sensex index rose by 80% and the NSE index, Nifty, surged by 75%—the best yearly performance since 1999. The BSE small cap index (BSE SML CAP) rose by 126% beating the 30-stocks benchmark index (BSE Sensex) by huge margins. The economic recovery helped commodity stocks shine the most, with the BSE Metal Index rising by 233%—the highest among the 13 sector indices on the BSE. Pump priming (fiscal stimulus by the government) helped automobile sales and the BSE Auto Index surged by 201%—the second highest among sector indices. The IT Index jumped by 131%, Capital Goods Index rose by 102%. The savior of 2008, the FMCG Index, was the worst performer in 2009 surging the least with 41% yearly appreciation.

Among index stocks, Tata Motors surged by 395%, followed by Jindal Steel and Power that was up by 368%, Mahindra & Mahindra that rose 287% and Sterlite Industries that advanced 229%. Information technology stocks like HCL Technologies and Tata Consultancy Services up by 222% and 210% respectively. The index losers include telecom players like Reliance Communications that was down 24% and Bharti Airtel that slumped 9%. The mid cap gainers include Aurobindo Pharma (up 444%), Mcleod Russel (up 439%), Bhushan Steel (up 363%), HOEC (up 352%), Havells (up 328%), and Shree Cement (up 316%). The non-index gainers include Oracle Financial Services Software (up 400%), Sesa Goa (up 380%), Mphasis (up 360%), Torrent Power (up 320%) and Tech Mahindra (up 300%). Such surge was possible on rise in liquidity levels post March 2009. As per Times of India report, the foreign institutional investors (FII) inflow to Indian equity markets in 2009 stood at Rs80,500 crore—the highest ever in a year and comes a year after they pulled out over Rs50,000 crore. FII inflow so far this year has broken the previous high of Rs71,486 crore parked by foreign fund houses in domestic equities in 2007.

The Sensex made a brisk turnaround from March wherein it surged by over 120% after making a low of 8047. At that point, the index traded at a nominal price/earnings (P/E) and price/book value (P/BV) of 12.68x and 2.47x respectively, while currently it is trading at 17701 with its P/E and P/BV at 22.63x and 4.25x respectively. Thus just like 2009, year 2010 may turn to be a very difficult for investors. The stock pick in 2009 was quite easy, as lower valuations across the board presented the best investment opportunities wherever one laid his hand.

Currently, the domestic indices trade higher to its mean P/E of 17x its earnings. Thus in 2010, stock investing may come with a pinch of salt.

One has to be very selective in considering the right and fundamentally good stocks that are part of the right theme and also are available at attractive valuations. The FII fund flows will also decide the direction of markets in 2010.