Bank of America Merrill Lynch said on Monday that it expects stock markets to post flat returns in 2011 after two consecutive years of strong performance.

Mr Jyotivardhan Jaipuria, Managing Director and Head of Research, DSP Merrill Lynch, said, “This is a typical cycle that follows sharp rallies, because valuations tend to run up a lot. 2009 was a big year and the two years after that we expected consolidation — which happened. In 2010, returns were at 15 per cent. This year we expect close to zero per cent returns.”

He added that FII funds flow would also be reversed to some extent as developed markets such as the US recover. Rising interest rates will worry investors, while company earnings outlook for 2011-12 will be downgraded to 15-20 per cent. Also in the next 3-4 months, the IIP growth will also be slow, he said.

However, GDP growth of 8.5 per cent is expected to balance out issues such as inflation and keep the economy buoyant. The global investment banking group also feels that lending rate may not go up enough to cause serious damage.

Mr Atul Singh, Managing Director and Head, Global Wealth & Investment Management, India, said that investments need to be aligned to sectors connected to rural income, such as the power sector, besides companies that are positively leveraged to US growth, like in the IT and pharmaceutical sectors. Agriculture is expected to grow 3 per cent in 2011-12.

On the implication for investors' portfolio, he said the markets will give opportunities in ‘preferred sectors', but patience is needed and one must have cash ready at the right moment. Outlook on investing in gold is positive and prices will stabilise, while for other commodities such as copper, one must tap the global markets.

Interest rates

Merrill Lynch estimates inflation to bottom out by April-May, but then rise again if the Government decides to raise diesel prices. On such worries, it expects the RBI to increase key policy rates by around 75 basis points more this year.

The pace of increase in the key policy rates would be slow, a 25 bps increase is expected in May, besides an SLR rollback. The fiscal deficit should be manageable at 9.1 per cent of GDP, while current account deficit would be at 3.4 per cent of GDP. A US revival should also boost exports, especially for software, said Mr Indranil Sen Gupta, Director and Chief India Economist.

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