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  • What to expect in 2013

    It is that time of the year when analysts and those wanting you to invest in the stock market would make predictions. You will see analysis of even this analysis by some. They will tell you how year end predictions were spot on or went horribly wrong. As an investor, it is important to get on top of factors that could influence share prices.

Here are a few factors that could influence share prices in 2013:

  • Corporate profits:It seems a section of investors have a hunch that corporate profits would improve from here on. The BSE Sensex is up 4 per cent in just one month. It is up 22 per cent over the past one year. Typically, smart investors tend to pick up these trends early. They are betting on an improved profit growth. You will see the number of analysts saying 'buy' on stocks rise over those saying 'sell' over the first half of 2013. Investors are not betting on an immediate surge in corporate profits. If analyst reports are to be believed, the expectation is more about an improved corporate performance in 2013-14. This means smart investors may not be in a hurry to buy shares. They could wait for corrections too.

  • Interest rates: A key factor to better corporate profitability would be the interest rate scenario. Companies have to get back into the investment mode and expand. At the same time, consumers should find borrowing easy for spending to fuel demand. For that, they need the Reserve Bank of India to bring down the borrowing cost. That is linked to the 'repo rate' set by RBI. This is the rate at which RBI lends money to banks. "We expect RBI to cut interest rates by 1.25 per cent as they increasingly shift focus on reviving growth," said a note on 2013 India strategy by Bank of America-Merrill Lynch, a global bank, last week. If this happens, it could encourage businesses to invest in expansion in 2013.

  • Economy: Managing the fiscal deficit is a key factor to lowering interest rates. This is the government's excess expenditure over income. For years, governments have missed targets of controlling expenditure. "Every finance minister talked of fiscal consolidation and then missed deficit targets," observes Credit Suisse, a global bank. The excess government expenditure means more borrowing from RBI. This makes it necessary for RBI to allocate money to the government. It puts businesses lower down the priority of lending. Businesses have to then resort to paying higher interest rates or borrowing from overseas. Interest rates stay high as a result. It would be a surprise in 2013 if the government is able to control expenditure and cut the fiscal deficit. Analysts expect the government to exceed the target set in the budget of 2011-12.

  • Foreign fund buying: A key factor is that FIIs have invested over $ 20bn in 2012 already. Their ability to invest more is driven by the easy money policy under the so called unlimited 'quantitative easing' by the US Federal Reserve.The US central bank has used this method to provide easy money to banks so that they can lend to businesses at cheap interest rates for expansion and thus stimulate growth. The flow of money could also depend on an overall improvement in India's macro-economic environment as well. "We maintain our neutral stance on India at this stage, as we await clearer signs that the government can indeed sustain the recent string of reform measures even in the face of vocal political opposition," UK's Barclay's Bank told its clients. While broadly foreign banks and their affiliates are positive, they are not really advising their clients to rush into buying Indian shares.

    • To understand what are global fund managers thinking about investing around the world in 2013  Read more

    • To get a sense of an even bigger picture of things that could influence the world in 2013, The Economist puts out a listing of 'The World in 2013' each year. Read more

  • 15

    The BSE Sensex one-year forward price-earnings multiple hovers around 15, according to estimates by most analysts. If you divide the BSE Sensex value by 15, you will get the aggregate expected earnings per share of 30 BSE Sensex companies for 2012-13. This is the multiple used to compare if the market is expensive or cheap. The historical trend in this number indicates that the market is considered cheap if the BSE Sensex trades at a multiple of 12 or 13. It is considered expensive if it trades at 18 or 19 multiple. In 2013, many pundits expect the BSE Sensex to continue to hover around the 15 multiple. This means they expect the BSE Sensex to gain 10-15 per cent from the current level of close to 19000.