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What to expect in 2014
The year 2014 would witness India head into a general election. Stock market analysts have to note the outcome of elections before advising you on where to invest in 2014. It is easier said than done. This is because any political uncertainty brings with it an economic uncertainty. The new Lok Sabha would be constituted on 1 June 2014, according to India’s election commission. Hence, uncertainty for the first five months of 2014 could dampen spirits.
Here are factors that could influence stock markets in 2014:
Impact of Elections 2014:
The stock market expects a stable government after general elections in 2014. The outcome of elections is critical for a policy direction. A government that encourages faster economic growth would be appreciated by investors, big or small. The other factor to watch out for is the plan of the new government to rein in the fiscal deficit. If the new government announces measures to cut non-plan expenditure, it would be cheered by the market. This is because a large deficit results in more borrowing by the government from the market. This further makes less money available for businesses to invest in growth and expansion. It is expected that a pro-growth government would take all necessary steps needed to boost the government income and rein in the government non-plan expenditure.
In a climate of policy uncertainty, it is not easy to predict how companies could do in 2014. However, there are a few sectors, which are expected to do well because of the tailwinds. For example, not all companies depend on Indian consumers and corporates to sell their goods and services. There are companies that get bulk of their income through exports. Everyone predicts US economic growth to remain strong in 2014. Companies in the IT sector and pharmaceutical sector that focus on exports to US could do better in 2014. On the other hand, if one expects a stable government to come to power, sectors that depend on infrastructure projects could do well, especially because their valuations are relatively low now.
After languishing for most of 2013, benchmark indices like S&P BSE Sensex and CNX Nifty rose around 5% over the past three months. The financial performance of companies in September 2013 quarter surprised positively. This improves prospects for better profit growth for companies in 2014.
Interest rates and inflation:
Interest rates are likely to be adjusted according to the trend in the inflation. RBI’s mid-quarter credit policy statement on Wednesday announced no change in benchmark interest rates contrary to an expectation of a hike. According to RBI, the WPI and CPI inflation are expected to come off due to moderating prices of vegetables. One also needs to look closely at the core inflation in CPI, which has remained at about 8%. A fall in food prices and moderation in core inflation are the pre-requisites for the RBI to hold or reduce interest rates in the future.
Markets have remained buoyant in 2013, partly due to the liquidity flows from FIIs, who have put in more than $18bn through the secondary market route during the calendar. With the US Fed announcing the taper program, there is uncertainty about how the flows will pan out in the future. While India’s forex position has considerably strengthened to counter any impact of the taper on the rupee, markets will be very sensitive to the direction and velocity of these flows going ahead.
The BSE Sensex trades at an expected price-earnings multiple of around 14.7, according to Kotak Securities estimates. This is for expected cumulative earnings per share (EPS) of all 30 BSE Sensex companies for the year ending March 2014. In December 2012, the PE ratio of the BSE Sensex hovered around similar levels. Market pundits expect frontline companies to grow at an average profit growth of twice that of the GDP. The RBI survey of forecasters predicts a GDP growth of 4.8% for 2013-14 and 5.8% for 2014-15. “We expect earnings of the BSE-30 Index to grow 9.5% in FY2014 and 13.1% in FY2015,” a Kotak Securities report said on Wednesday.