If it weren’t for the sharp pick-up in stock markets in the December quarter, 2013 would have been a dreary year indeed. In the very least, the rally has reposed faith of long-term investors in equities as compounded growth rates over five years now look encouraging. Markets now have a solid base which will likely consolidate further with gains in 2014.

But first we must look at 2013 in a perspective to understand how the next year can be different and more rewarding. Nothing seemed to go right in 2013 — neither for debt nor for equity and the economy. On the bright side, it means that things can only improve in 2014.

Debt funds perform

The first half of 2013 belonged to debt investors with falling inflation seeing yields dip to as low as 7.12 per cent. This saw an improvement in the performance of long-term debt funds.

Equity markets for most part were tepid over that period and did nothing for investors.

The second half of the year saw a reversal in fortunes of debt and equity markets. WPI inflation rose from a 42-month low of 4.7 per cent to as high as 7.5 per cent in December. There were rate hikes to contain inflation, which obviously debt markets did not take kindly.

There was nervousness about the rupee which came under pressure following talk of Fed tapering in May. It led to a strong outflow of portfolio money from debt markets, pulling the rupee down to near-Rs 69 against the dollar. The widening current account deficit (CAD) presented another problem.

Springs a surprise

All this led to hardening of bond yields, which rose consistently over the months settling at 8.9 per cent at the time of writing this note. As a result, existing investors in long-term debt funds witnessed a fall in their portfolios.

Equity markets after lying low for the first half of 2013 went into something of a frenzy, from 18,000 to an all-time high of over 21,000. By year-end, just the BSE Sensex shows a five-year CAGR of over 16 per cent with certain actively managed funds doing much better.

More importantly, in our view, there is a platform over which gains in 2014 can be consolidated.

But how are these gains going to come about?

Let’s take politics and government policy first because that for sure is likely to change once we have a new Government in 2014. Everyone agrees this is going to leave a positive impact on the business and the economy with both parties saying the right things.

The rupee has already corrected settling at a more realistic Rs 62 level and this after the Fed tapering became a reality.

The CAD at 1.2 per cent of GDP over July-September from 5 per cent of GDP in the April-June quarter looks a lot more manageable. Inflation, which has spiked mainly due to sticky food prices, could head lower once the benefit of good monsoon begins reflecting in food prices.

Promising year ahead

The year 2014 might see investor-friendly regulations being introduced to make the mutual fund industry more transparent and engaging. KYC formalities should be tweaked to make it more useful to all stakeholders.

Our advice to investors while picking investment opportunities is to identify solutions not just a fund or a stock. So build a portfolio with the help of your financial planner that can help you save for your child’s education or marriage or towards a new house or a pilgrimage trip or a vacation. Save with a plan in mind not with a mutual fund or stock in mind.

All in all, 2014 looks promising. It could be the year when everything fell into place.

(The author is the Chief Executive Officer of Edelweiss Asset Management Ltd. The views expressed are his own.)

(This article was published on December 31, 2013)
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