As world pump-primes, will Indian equities lose in 2011?

After trumping Asian peers this year, the Indian market may be heading for a year of underperformance as a turnaround in the developed world helps export-focused  economies such as South Korea and Taiwan outperform in 2011, experts said.

“Combining a better US outlook with more policy tightening and inflation pressures in Asia, the conclusion for us in terms of positioning is that we are more oriented towards the northern part of Asia and more externally focused part of the region,” Timothy Moe, chief Asia Pacific regional equity strategist at Goldman Sachs, said on Wednesday.

Sakthi Siva, Asia-Pacific strategist for Credit Suisse, had said recently, “Global growth is bottoming out and we advise a switch out of domestic-oriented markets like India. We are more positive on export-oriented markets.”

Both brokerages are underweight on India.
The outlook for the United States has improved in recent times. The US Federal Reserve has recently announced plans to pump in $600 billion (Rs27 lakh crore) into the economy in an effort to spur activity and boost growth.

Ben Bernanke, the chairman of the Federal Reserve also suggested that authorities are willing to consider another stimulus package if required.
Goldman Sachs has raised its view on the US to 2.7% growth for 2011, the first time in five years that its view has been above the consensus.

The brokerage, which was earlier looking at 1.9% growth, has also introduced a new forecast for 2012, of 3.6%.

Going by Credit Suisse, the chances of a double-dip in the global economy are receding and data from October suggests global industrial production may be bottoming out earlier than expected.

An improvement in the prospects of the developed world is expected to benefit economies oriented towards them.  

In Asia, Goldman Sachs has been underweight on India while upgrading Taiwan and Singapore and continuing to be positive on Korea.

Korea is also the biggest overweight for Credit Suisse.

Among the key risks for India is inflation, which has remained high despite a good monsoon. Both wholesale price index at 8.5% and consumer price index at 9.9% are above the central bank’s targets.

Additionally, India is trading at a 30% premium to its peers in the Asian market, excluding Japan, and has accounted for 50% of the flows to the region in 2010. Foreign institutional investors have been net buyers in Indian markets by Rs1.36 lakh crore in 2010.

The Sensex is trading at 22.69 times its earnings over the previous 12 months. At Wednesday’s close of 19696.48, it has gained 12.78% so far in 2010.

But there’s no suggesting yet that the India story is over. The impending underperformance to Asian peers notwithstanding, analysts expect up to 20% upside for the local market over the next 12 months, riding on strong earnings growth.