Market conditions create potential sectors

This is the first month of the new financial year - 2010-11 . The markets have run up since the Union Budget announcement and going forward, the direction depends on several factors including the pace of the economic recovery in developed global markets, steps (policy actions) taken by the Reserve Bank of India (RBI) to contain the inflation rate and investor perception of its impact on growth, and Index of Industrial Production (IIP) data.

The monsoon is another important factor to watch as it has a widespread impact on the overall economy. Investors should look at balancing their portfolio with large-cap and mid-cap stocks. The large-cap stocks have a tendency to out-perform during the correction phases and mid-cap stocks have the tendency to outperform during the bull run phases. Investors should analyse the economic and business conditions, and identify favourably-placed stocks and sectors in order to get better returns.

Based on the current situation , here are some of the promising sectors, expected to perform well in the medium to long terms:

Auto

The auto sector is doing well over the last few quarters , backed by tremendous volume growth due to the rise in disposable incomes of the middle income group, and launch of new models in the market.

Analysts believe the volume growth is expected to remain strong in the coming quarters and auto stocks are expected to do well in the medium term.

Banking

The credit growth has picked up over the last few months and is expected to remain strong with improved economic conditions and pick-up in corporate demand.

The interest rates are also expected to go up in the short term which favours banks. Loans are repriced immediately. Therefore, the net interest margins (NIM) are likely to go up.

A higher NIM along with loan growth results in improved earnings in the medium to long terms.

Hotels and tourism

The travel and tourism sector in general is picking up. The thrust on domestic tourism and rise in disposable incomes of the middle income segment will result in more business for the companies operating in the hotel and tourism sector.

Information technology:

The information technology sector has the potential to do well as the global economic conditions improve. Investors should go for frontrunner companies that have well-diversified execution models, a wide base and the power to hedge against sharp currency movements.

Paper

The paper sector is expected to fare well with improved economic conditions and corporate growth. The paper prices have moved up over the last few months and the companies are expected to encash on the increased demand and pricing situation in the coming few quarters.
Investors can add some front-runner paper companies to their portfolio to increase diversity.

Tyre

The companies in the tyre sector are expected to do well from a medium term perspective, fuelled by robust demand.

The auto sector (both two-wheelers and four-wheelers ) has had major volume growth over the last few quarters due to improved economic conditions and consumer sentiments . Also, a number of new automobile companies are planning to enter the market.

There are some concerns on the rise in raw material prices (rubber) but the robust demand will help the tyre manufactures to pass on the cost to customers and hence the outlook for this sector is promising in the coming quarters.

A significant portion of the global transportation fuel market in places such as India and Europe relies on diesel and cannot benefit from cellulosic ethanol technologies . For these markets, jatropha -based biodiesel has great potential as an alternative fuel.