Driven by sustained Foreign Institutional investment, and buoyed by election euphoria, we saw the markets touching all time high this year. The various steps taken by the Central Government and the new RBI regime in order to bring down CAD, support rupee, boost manufacturing and curb rising inflation has indeed sent out positive vibes, even though, such measures are yet to translate into growth numbers. Thus, as we usher in a new year, and as equity indices are near record peaks, market participants wonder, if we are at the cusp of a powerful rally, or a disappointing fall. Meanwhile, general elections scheduled for 2014, pose grave risk to year end projections.
QE impact factored in.
Federal Reserve has started to taper its bond buying program in a phased manner. In its last meeting of the year, it decided on cutting down the bond purchase to $75 billion from $85 billion. The Fed is likely to reduce its bond purchase in steps of $10 billion over the next seven meetings before winding up the QE3 program by end of 2014, meaning that there are less chances of this QE3 becoming QE infinity as has been wished some sections!. Or atleast until US economic data warrants a pause in such reductions or similar measures. But, what is evident now from markets reaction to these news, is that the downsides of lesser easy-money may have been more or less priced in.
While there have been strong FII inflows to India in 2013, China is increasingly becoming more attractive with recent signs that the country will continue to develop its financial markets. According to reports, China-focused hedge funds managed USD12.9 billion in assets as of the end of September, exceeding levels before the global financial crisis. In September 2013, China had announced a basic plan for a newly established free-trade zone in Shanghai that would give foreign companies greater freedom in the countrys tightly regulated financial markets and the regulators are expected to promote oil derivatives and allow securities and futures companies in the zone to engage in over-the-counter trading in commodities and financial derivatives in the domestic market. Also there are reports that China has approved a new plan to allow US investors to indirectly access its stock markets which is seen as a major step towards opening up of their markets. So, a good part of the money that has already come to India, could as well as go to China or other emerging economies.
Elections bring hope, not assurance.
Recent market rallies around assembly elections have given us a glimpse of what markets could do in the event of a political environment that is more favourable to business. While popular sentiments as well as media reports see a new government with BJP at the centre as a game changer for markets and economy, it is simplistic to imagine that a single party could pull its weight effectively enough in the present fragmented political picture. Or to imagine that the stubborn challenge of inflation or the nagging problem of global economic slowdown can be dismissed by a couple of policy changes. In a cricket parlance, we know how good or bad the pitch is, only after the second team has batted. On an optimistic note, sometimes, a change in face or approach could do what a dozen of policies could not. Such hope could keep the markets upwardly projected through the year though, the trading ranges and volatility could be bigger, as we would consistently bump into rough weather owing to inflationary pressure on growth initiatives, which may be fairly expected to be a persistent theme next year too. Infact, only a small rise of 1.4% in overall hiring numbers was predicted by a study done in association with CII, pointing at the industrys general outlook.
After that last rate announcement of the year, having maintained rates, RBI Governor Raghuram Rajan told that I also want to emphasise that it shouldnt be taken that were on hold. We are waiting for data. Hence as the data come in, we will react appropriately. If that be the case, we have a real problem.
Newer peaks in 2014; newer products.
Though the peaks seen around December elections fizzled off soon, it is indicative of a potential that is waiting to be harnessed. The persistence and the quantum of FII money that has flowed into Indian financial markets are impressive. According to data compiled from SEBI, FIIs have invested over one lakh crore rupees in the Indian stock market so far in 2013, which is suggestive that markets are poised for bigger up moves in 2014. Meanwhile, DIIs have been net sellers of over 9000 crore rupees in November, which is consistent with the trend of retail investors, whose decisions influence MFs, Insurance companies, liquidating at recent peaks. This also suggests that we could have more retail participation once newer peaks are seen. Further, with inflation remaining a persistent theme in the last one year, real savings have been difficult, and the launch of inflation indexed bonds could, possibly, influence the way investors approach several savings modes, especially with inflation priced in. This could also increase interest in bonds. Mergers and Acquisitions, which at around $28 billion in 2013 has been at the lowest level in three years. With improving macroeconomic fundamentals, year 2014 could see more such M&As. Investors who track such moves closely would be able to benefit from value-unlocking.
Anand James, Asst. General Manager, Geojit BNP Paribas Financial Services Ltd.
NOTE: The vies expressed are those of the author.