However, given the current valuations and the gradual turnaround in developed economies can this trend continue through 2010?

For a start, the domestic economic outlook does look positive and set to replicate a close-to-2009 kind of GDP growth. Importantly, for that sustainable growth, the Services sector will have to be a major contributor. It’s been different industries which have contributed to growth in different years.

Auto and IT did so in 2009, this could be very different in 2010. One can expect IT, cement and steel to see good growth. Besides, banking and infrastructure will continue to be among the performing sectors.

Corporate earnings estimates in India for 2010 have clearly been revised upwards. In the last four to six  quarters, there hasn’t been too much topline growth and margins have improved through operational efficiencies and lower input costs. The question that has not yet been answered is, is there enough visibility for the same kind of earnings growth for 2011 and beyond?

Well, we haven’t seen too much of capex in the last two years to provide a visibility for topline growth, the expected credit growth hasn’t happened despite low interest rates, and input costs are fast rising, so where will higher earnings come from in the next two years? Rising domestic consumption demand appears to be the only possibility.

Emerging markets, traditionally more cyclical, have experienced a strong rebound in 2009, also leading to valuations closer to their long-term average.  At around 16, the expected price/earnings multiple for 2010 for India is higher than that of Korea, China and equal to Taiwan.

Could this be a big deterrent to FII flows into India in 2010? To some extent, yes. The US Dollar strengthening, or interest rates in mature economies rising, can reverse/ slow down the dollar carry trade gradually during 2010. As valuations stretch, one can expect continuing, but slower, more cautious dollar flows into India and the Emerging Markets.

Take a look at the other concerns. We all know the impact a truant monsoon has had on consumer prices, that could be an uncertainty for 2010 as well. The ballooning fiscal deficit is another one. Will disinvestment bring it under control? Not entirely.

Higher inflation will lead to gradual increase in interest rates if signs indicate demand led inflationary pressures. Currently it’s largely a lack-of-supply oriented inflation, not easily correctable in the short term. Given the key concerns, one would say the outlook for India is cautiously optimistic to positive.

The key contributing sectors will rotate. Mid caps might continue to outperform the large caps as in 2009. Since we are starting from a higher base, the returns will be lower than in 2009. But its India and the Emerging Markets that are likely to be favoured money destinations in 2010. Or would they?

(The writer is Executive Director & Head, Societe Generale Private Banking India. )