Some sectors to track in 2010

As a very eventful 2009 draws to a close, it is time to put on your thinking cap to identify investment candidates for 2010. The stock markets are currently trading at fair values. Hence, generating good returns in 2010 will not be as easy as it was in 2009. Investors have to research in depth to identify potential winners. Opportunities for investments could arise in areas or sectors that are in the process of positive change. Sector approach to investing may yield higher returns if investors can identify major change in trends and fundamental shifts that occur in a sector periodically. In 2009, the metals and auto sectors out-performed the index by a wide margin. Who could have ever guessed in the beginning of 2009 that the sector that would lead the markets out of its deep recession will be the auto sector? The auto sector was an underdog for a long time and is performing well now. In hindsight, you can see that the excise duty cuts in the form of stimulus were the trend-changers for the auto sector. Investors who had picked this sector for investments last year would have made handsome returns.

 

Sector Focus

Sectors that could perform well in 2010 could be banking, power, retail, automobile, telecom, pharmaceutical and real estate. Telecom and real estate sectors look interesting from a value investor's perspective. These sectors are highly under-valued and suitable for investors with some patience and ability to wait. The banking sector would probably be the best-performing sector in the first half of next year. On a relative basis, it may offer much better returns to investors than many others.           Here are some of the probable top performers in 2010:

 

Banking

The outlook for the banking sector has improved in the last six months with the uptrend in the GDP numbers . With the implementation of Basell II accord, the sector is poised for a structural change. There will be a spate of consolidation and investments through FDI bringing in some major positive changes in this sector. Technology initiatives such as ATMs, telephone banking, online banking and web-based products are the fundamental shifts in the banking sector. Banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee-based income. Public sector banks have been restructuring their businesses by incremental provisioning for non-performing assets. All banks have captured a high proportion of low cost deposits with better penetration in the semi-urban and rural areas, thereby reducing their cost of funds. Small public sector banks are targets for consolidation and hence are very attractive investments at the current juncture.

 

Power

The Electricity Act of 2003 was the game changer in the power sector. The licensing requirements have been reduced, and a generation company will be free to enter the distribution business and vice-a-versa . The Act also contains provision for securitisation of accumulated dues. Restoration of the financial health of boards and improvement in their operating performance is the key to profitability in this sector. On an overall basis, power distribution has been a loss making business. But privatisation is expected to change that. The distribution business has already been privatised in Delhi. Following Delhi's example, many States like Uttar Pradesh, Gujarat and Maharashtra are privatising their distribution circles. As some areas in the country are power surplus and others deficient, trading in electricity has brought a sea change in the structure of the industry. The potential for power trading is huge and the sector is in the process of change.

 

Telecom

There are several broad divisions in the telecom sector. Telecom companies have grown big till now on voice. However, going forward, the ability to carry data holds the key to success. Earlier, telecom companies made a lot of money from landlines and wireless telephony. Now, the biggest gains are being made on the data side. If you go back 10 years, the penetration of telephony was small. However, it has grown now. Over the next decade, data will probably play the same role. Data traffic is still modest. This change from voice to data can transform the profitability in this sector. The ability to identify the shifting sands in any sector can help an investor generate additional returns. Investors can invest in top companies in these sectors after consulting their financial advisors.

By Shubha Ganesh, ET Bureau