"Market is likely to be no better or worse than 2013".

General Elections, High Inflation, Volatile Interest Rates are some challenges to be encountered by the Indian Markets in 2014. But these turbulences will only stabilise the market and the Mid-Cap stocks are likely to make a comeback. What's in store for you this New Year? We tell you right here. 

"Market is likely to be no better or worse than 2013". 

That is a dramatic statement. But in markets such as India only larger global events can bring deep corrections in the equity market. You can recall the jitters created by Tech Bubble in 2000 and Lehman Crisis in 2008 on the Indian stock market.

Local events and developments - all said and done - are not so important given the fact that India’s demographic situation does not lead itself to sharp and sudden falls in growth rates.

While the markets in 2013 fell from February to August only to rise again. In 2014, we feel such a correction could get postponed by a couple of months in view of the forthcoming general elections. But before that, we may witness our markets making new highs.

Optimists’ take

Optimists feel that nothing can go wrong with our markets on the back of the sustained FII inflows, lesser disappointment from macro and CAD numbers, lesser than expected downward reaction to the news of Fed tapering and micro numbers from hereon.

We however feel, 2014 may witness the return of Indian investor in equity markets even as other asset classes such as gold, real estate etc do not show similar promise and the broader markets have begun to perform. Interest rates in the system could remain high up to April given the seasonal high liquidity requirements and tight Govt spending amid the fiscal situation. It is likely to soften later. This expectation could lead to build up in stocks that could benefit out of easing interest rate cycle.

Pessimists’ view

On the other hand, pessimists feel that Indian markets have already run up and are now close to its long-term average valuations. Corporate profitability may not recover substantially till the end of FY14 on the lacklustre demand due to inflation (for consumer) and lack of policy thrust (for businesses). Further the fact that US economy (4.1% GDP growth in Q3) and the Japan economy has recovered smartly (and interest rates in the US beginning to rise – 10 year G-Sec yields 3% - despite the beginning of tapering of the stimulus program. This implies the fund flows could now go towards developed markets and flow out of emerging markets. This seems like a real possibility.

The 2014 Election and its Implications

While the possibility of the sharp and sudden fund outflows remain in the event of a negative political development in India before or after the elections, we think that India is a market that cannot be ignored by global investors, especially when the situation in other emerging markets including China and Indonesia remains dicey. Hence on every such large domestic negative trigger, long term FII money could flow in to replace the short-term monies (though the intermittent volatility in the markets cannot be avoided).

While the Government, regulators and bureaucrats need to be complemented for the adept handling of the situation since May 2013, they will have to work towards avoiding recurrence of this situation in future.

Interest rates could remain high at least till April 2014 led by high inflation and liquidity crunch. The Rupee could also remain volatile with some intermittent weakness led more by global developments although lesser volatile than in 2013. Worries about the fiscal deficit also may impact sentiments. India’s capex cycle may kick off only towards the end of the calendar year.

Mid caps will make a comeback

After severe under performance in the past few years, mid caps and small caps may make a comeback in 2014 and narrow the difference with the large cap in terms of valuations. Even as the BSE Sensex reached an all-time high in 2013, the broader market represented by the mid- and small-cap indices are traded at 20% and 50%, respectively, below their historical highs. Hence the broader markets may perform better than the frontline indices. Even as farm sector growth slows down (owing to a high base effect), a pick-up in industrial sector growth is likely to propel GDP growth in FY15.

While the outcome of the elections is keenly awaited and the bets are placed on the differences in growth rates based on these outcomes, we feel that there may not be a large actual difference in the growth rates irrespective of the outcomes (unless the current opposition alliance gets a clear and large majority whose possibility at this point is not very large). The initial run of positive sentiments arising out of expectations may wither away in a couple of months post the formation of the Govt.

However from a long term perspective, India seems to be marching towards a much cleaner business and governance environment going. This can be underscored by the recent reforms processes, judicial activism, changes in politics (AAP win) and bureaucracy. We think that structurally India is headed for much better times over the next 2-4 years. However the road to change will inevitably bring its own small turbulences on the way.

The Final Call

In 2014, PSU, Power, Auto and IT indices may do well. Defensive sectors like FMCG, Pharma may underperform but some exposure to these sectors is advised.

Written by Deepak Jasani

Double booster for the Indian markets

Indian markets got a double booster. Firstly the Reserve Bank of India (RBI) did not raise interest rates in the monetary policy statement announced on 18th December 2013. Secondly the US Fed began tapering the stimulus but the global markets have reacted upwards. 

Despite the increases in both the Wholesale Price Index (WPI) and Consumer Price Index (CPI) in November, the RBI maintained status quo on policy rates. Markets had already factored in a rate hike of at least 25 bps. 

The Fed said it would reduce its monthly purchases of mortgage-backed securities and U.S. Treasuries to $75 billion per month, down from $85 billion, beginning in January 2014. The Fed's decision also can be interpreted, as a sign that the US economy is back on its feet and no longer needs as much stimulus.

The Fed has been buying bonds since 2008 and many investors say the liquidity boost has been the main driver of the bull market in stocks since 2009. The bond-buying program has become so large; it is expected to push the Fed's assets to $4 trillion this week -- money the Fed basically created out of thin air.

For much of 2013, any inkling from Fed Chairman Ben S Bernanke that the central bank would pull back on its stimulus was viewed negatively by investors. Stocks fell, bond yields spiked, and good news turned to bad news as investors feared positive economic data would cause the Fed to reduce its bond purchases sooner rather than later. But for now, the taper hysteria may have subsided. 

The taper, when combined with a growing economy, steadily rising interest rates, and tame inflation, will lead to US stocks climbing even higher. Hence this could also divert flows into the US economy and out of other markets including emerging.

In fact, the Fed extended its commitment to keep short-term interest rates "exceptionally low" until either the unemployment rate falls to around 6.5% or the inflation rate exceeds 2.5% a year.

QE was a huge negative for India after the initial euphoria in CY09 died out as higher commodity prices esp. gold and oil (up ~50% and ~100% resp. since the QE started) hurt Indias inflation, fiscal deficit, current account deficit and currency, in general. 

As a corollary, a potential QE reversal is good news for Indias macro after the markets react negatively in the initial months of the QE reversal.

Markets typically make short term/intermediate tops or bottoms around crucial events. Only time will tell , whether these two crucial events will trigger similar events  

Overall the Indian markets may head higher in sync with other markets and then form some sort of a near term top in a couple of days. 

After a correction that may last from 2 weeks to 2 months (and possibly till 5900 Nifty), the India markets could enter a consolidation phase making a base for a big rally starting in mid 2014. 

However in case the Nifty breaches 6300 in the next couple of days and stays above that, then the correction could begin after making a double top or a slightly higher top.

Written by Deepak Jasani

5 Mutual Fund Myths BUSTED!

Myth 1: It is better to buy units in a new fund offering at Rs 10 than existing funds at higher NAVs.

Reality: The performance of the mutual fund whether existing or new scheme solely depends on factors like the skills and investment strategies adopted by the fund managers, quality of the portfolio, exposure to various industries and so on. In fact, when it comes to investment there is no difference between new schemes selling at par value or existing schemes selling at higher price. The return, as a percentage of the capital, which you have invested, will determine which investment was a better choice.

Myth 2: Stocks generate higher returns than mutual funds.

Reality: The returns the mutual funds generate depend on the type of mutual fund scheme you select. That applies for stock investments as well; the return you receive could be good or bad depending on the stock that you choose. For instance, index funds usually report returns that are in sync with the index, which they try to mirror while pure equity funds can outperform the index by a wide margin.

Myth 3: Investing in mutual funds is an expensive proposition. Mutual funds charge various expenses such as entry and exit loads, annual asset management fees and other expenses.

Reality: Though mutual funds levy various fees they are not an expensive proposition. When you invest directly too there are certain expenses that you will have to bear. In fact, the additional charges that you pay towards fund management, etc., end up benefiting you since it results in investment decisions which are better researched and more meticulous monitoring of the performance of your investments on a continuous basis.

Myth 4: Mutual funds guarantee returns. Some mutual funds assure their investors a certain level of returns.

Reality: Mutual funds are subject to market risks and do not guarantee any kind of returns to unit holders. The performance of mutual fund schemes should be compared with benchmark indices and judged accordingly. It is quite possible that even the best of fund managers may not be able to deliver consistent returns over the years.

Myth 5: Lower NAVs translate into better investment opportunities. Mutual funds with lower NAVs can generate better returns.

Reality: Lower NAVs do not mean a ‘cheap’ investment opportunity. You need to look at the long-term returns generated by the scheme in question. Here, returns mean capital appreciation and dividend paid, if applicable. The track record of the fund manager and the composition of the portfolio of the schemes are also critical factors, which you should consider while choosing the right scheme.