Most foreign institutional investors and domestic brokerage and fund houses are likely to enter 2014 with more optimism than in the past few years. So far, the BSE Sensex has returned about 8 per cent this year, while the BSE Mid-cap and Small-cap indices tumbled 9 per cent and 16.5 per cent respectively. Among sectors, technology and pharma shares have done extremely well in 2013.

So, what is in store for the market in 2014 and which theme will play out strong returns?

The biggest event of the year is the general election in May. Analysts are already crystal-gazing on the outcome of the election. Most analysts wish that a stable dispensation will be in place at the Centre after the election, preferably one led by Narendra Modi with a comfortable working majority.

According to Goldman Sachs (November 28 report), 2014 will be a transition year for India. “This is primarily due to the important Parliamentary elections expected in April-May 2014. Greater reform momentum, combined with a removal of uncertainties, could propel the economy forward and improve its diminishing growth potential,” Andrew Tilton has said in the report.

Apart from the general election, other major risks include tapering of the easy liquidity policy by the US Federal Reserve and China's growth.

Among sectors, most analysts prefer stocks that will benefit from an economic revival and sectors such as auto, private banks and oil, which could gain from reforms.

Some even advise a small exposure to deep cyclicals, which include beaten-down infrastructure players and Government banks.

Analysts expect the banking and financial sector to outperform in the coming year, as net NPAs (bad loans) may have peaked. They foresee that asset quality issues may abate in the next few quarters. For most, valuations are attractive at current levels, particularly for PSU banks, but suggest that investors limit their exposure to large-cap banks.

Analysts also believe the metal sector will outperform, driven by the improving demand outlook of developed economies.

Telecom also finds favour with analysts on account of consistent earnings upgrades.

Most analysts also expect 2014 will be a strong year for companies that will increase investment spending. Besides, companies doing large buybacks and firms with a high operating leverage will also do well. As the economy improves, companies with high fixed costs will also do better in 2014, say analysts.

However, they see little upward scope for healthcare and pharmaceuticals stocks, given their current valuations.

Information technology remains neutral for most financial advisors. Though most analysts estimate the IT sector will continue to see earnings upgrades and would likely benefit further from the early signs of demand revival in the US, they feel most IT stocks, particularly large-caps, are ruling at elevated valuations.

Most analysts are also advising investors to stay away from fast-moving consumer durable stocks due to expensive valuations.

Diversification is a strong argument for Indian investors. A part of the investments can be considered for gold and global stocks/indices, advise analysts.

But one common piece of advice to retail investors, particularly from domestic brokerages, is to seriously consider passive investment vehicles such as index funds and diversified equity funds.

badrinarayanan.ks@thehindu.co.in

(This article was published on December 15, 2013)
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