Will 2014 be a bumper year for markets? - No

There are multiple concerns and uncertainties confronting the stock market at the start of 2014. The economy is still tottering and corporate earnings are declining. The outcome of the general election and the impact of the Federal Reserve tapering are not yet known. Even if frontline indices move higher from these levels, due to the momentum generated by the ongoing rally, a sharp correction is equally likely as reality sinks in.

The Sensex has gained about 35 per cent since the beginning of 2012. After a year of intense volatility, during which the index even tested the low of 17,449, it ended 2013 close to its lifetime high. It is common human fallacy to extrapolate the prevalent trend. Hence market participants get very bullish when the index nears its highs and extremely bearish when it hits lows.

But the list of negatives is long. To begin with, economic growth is far from healthy at below 5 per cent. With the RBI reluctant to reduce rates due to consumer inflation remaining stubbornly above 11 per cent, growth is likely to be muted, at least in the early part of the year. Another 25 basis point hike in policy rate — which cannot be ruled out — will peg recovery back further. Fiscal deficit for the April to November period at 94 per cent of FY 2014 target also means that the government will rein in its spending, hurting investment further.

Impact of slowdown Since many of the sectors such as infrastructure, capital goods and auto are dependent on economic growth and policy rates, the financial performance of companies will be affected by the ongoing slowdown. A relatively stable movement in the rupee this year can reduce the profitability of the IT and pharma sectors; the stocks in these sectors led the rally last year.

At 18 times price earning multiple, the Sensex is more expensive than other emerging markets such as China, Singapore, Thailand and Russia.

With India’s economic growth, too, lower than many of its emerging market peers, allocation to India is not likely to pick up spectacularly this year.

On the backfoot The taper of quantitative easing, set to start in January, has resulted in yields on US government bonds already spiking above 3 per cent. This will make US-based FIIs increase allocations to US treasury that is free of currency risk associated with other sovereign bonds. Secondly, foreign investors do not like uncertainty linked to political change. They are likely to be on the backfoot till the outcome of the Lok Sabha election is known.

At current levels, a BJP victory and a slew of economic reforms thereafter is already priced in. But there is no quick-fix solution to our economic woes even if a reform-oriented government is formed. If there is a fractured mandate, the market is sure to head lower. History shows that the Sensex has always ended with losses in years when a shaky coalition takes charge at the Centre.

Also read: >Will 2014 be a bumper year for markets? - YES

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