New Samvat year (New Year according to Hindu calendar) begins this weekend. Most analysts had predicted a BSE Sensex target of 24,000 in the current year, but lack of reforms, deficit worries and global uncertainties belied their expectations. Over the past few years, India Inc has suffered setbacks due to rising operating costs and declining margins.

So, what is in store in Samvat 2070 for investors?

Two factors will be the most important for Indian markets: global liquidity and the outcome of next year’s Parliament elections.

As the US Government shutdown and debt ceiling worries have receded, the liquidity flow towards emerging markets will increase.

Foreign institutional investors have poured in Rs 4.15 lakh crore into Indian equities since 2009. Yet the benchmark indices – the BSE Sensex and the NSE's Nifty – are to retest their 2008 peak levels. The performance of broader indices such as the BSE Mid-cap and the Small-cap is worse, as they are still far away from their peak levels.

However, indices will reach new heights, thanks to an extended era of excess global liquidity. With trillions of dollars sloshing through global markets, it is inevitable that speculative exuberance will fuel a rally in risky asset classes and emerging markets, including India. The risk-on strategy will continue due to the abundance of liquidity that will help several beaten-down stocks to recover, which are ruling at multi-year low levels.

While economists and analysts are debating whether the economy has bottomed out or not, there are now renewed hopes in corporate circles of a pick-up in the investment cycle.

However, any uncertainty on the political front after the next national elections in May 2014 will derail the bullish sentiment.

The economic agendas of the two main coalitions suggest that a BJP-led government may be beneficial for investment demand, especially in the infrastructure sector, while a Congress-led government may emphasise consumption demand, especially rural, said investment bank Goldman Sachs.

According to UBS, while a Narendra Modi-led Government would be the best outcome for investors, a Congress-led Government may disappoint markets initially and a Third Front-led formation would be “an overhang but may not be that bad” ultimately.

Brokerage firm Kotak Securities said: “Political uncertainty notwithstanding, we believe India will continue for some more time with its confusing and contradictory mix of gradual privatisation of the economy and entitlement politics. “This will change for the better over the next decade as the Indian political system will have to adapt to a new economic reality,” it added.

If markets were willing to bet on a positive political outcome, which aids economic recovery, then where might the markets go?

“In such a scenario, we estimate earnings growth in FY-15 can potentially be 15 per cent and markets could potentially re-rate back to 15x forward PE (price earning). This indicates a potential Nifty value of 6,800 in 2014 post-elections,” added UBS.

Will Samvat 2070 create a new history for Indian stock markets?

>badrinarayanan.ks@thehindu.co.in

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