 "One stock at a time")
The law of probability has never been more important on Dalal Street. At the beginning of the year, the odds favoured bears. The Sensex had rallied 25 per cent in 2012, creating a high base effect. GDP growth remained on a downward trajectory and reached a decadal low in the June quarter. The rupee was constantly under pressure and at one point lost nearly a fifth of its value.
The stock markets reacted predictably and the Sensex was down 15 per cent by the end of August. It looked set to erase all gains of 2012, and more.
But just when it seemed that bears had the market in their grip, the balance of power tilted in favour of bulls, the moment Raghuram Rajan took charge as the 23rd governor of Reserve Bank of India, on September 4. A mix of pep talk by the new governor and a slew of measures to stem the outflow of dollars injected life back into the bulls and there was a rally in both rupee and stocks. By the end of October, the rupee had recouped half of losses and stocks rallied. The Sensex made a new lifetime high on December 9 after a gap of over three years and it seemed nothing could stop bulls now. The new high, however, soon became a resistance and nothing dramatic happened.
Bulls and bears settled for a draw and the Sensex ended at the year with gains of nine per cent. Investors just about managed to protect their wealth against inflation, running in double digits. The rupee ended 2013 with a modest depreciation of 13 per cent.
Analysts expect more of the same in the new financial year considering a lack of momentum in corporate earnings and a host of macro economic and political uncertainties, including monetary tapering by the US Federal Reserve, inflation fighting by RBI and the uncertain outcome of the coming Lok Sabha elections.
In calendar 2013, the underlying earnings for Sensex companies was up seven per cent, its slowest pace in four years and less than half the Street consensus estimates. The Sensex companies' combined earnings is expected to grow 16 per cent in FY14 and 13.8 per cent in FY15, according to Bloomberg consensus estimates.
"The advent of QE tapering and expected macro adjustments in India in FY15 will test market exuberance is visible since September. Any mismatch between earnings projections and actuals could trigger market volatility," says Dhananjay Sinha, co-head of institutional equity at Emkay Global Financial Services. He expects India Inc's actual earnings to fall short of the Street's 'optimistic' projections for 2014. (THE OUTPERFORMERS & UNDERPERFORMERS)
Historically, there is a strong correlation between the Sensex and underlying earnings growth. The rally between 2003 and 2007 was accompanied by a high double-digit earnings growth that more than tripled the Sensex's underlying EPS between 2007 and 2002. Conversely, the market meltdown in 2008 coincided with a sharp deceleration in corporate earnings that year. (See chart).
"Most of the macro-economic factors that affected corporate earnings and investments remain unchanged. It ensures indices will be driven by sentiments rather than fundamentals," says G Chhokalingam, an independent analyst.
The biggest uncertainty is the 2014 general elections. If it results in a stable government led by either of the national parties, companies will have an incentive to scale up investments, leading to a faster recovery in GDP growth and earnings. However, if a rag-tag coalition of regional parties (read third-front government) comes to power companies might cut back on big-ticket investments, hurt growth and earnings further.
In 2014, investors also have to contend with what Sinha calls 'reverse-de-coupling' -outflow of capital from slow growing emerging markets to the developed world, where economic recovery is gathering pace. The global portfolio rebalancing will be hastened by the US Fed tapering and could drag down the rupee and the benchmark indices to lower levels.
Others see opportunity in beaten down quality names in capital-goods, media, commodities, power and telecom, among others despite any apparent lack of earnings triggers. "Defensives and export-driven stocks will remain in vogue, given the macro-economic uncertainty. Investors could also accumulate quality stocks, given their low valuations and those that could gain from policy triggers after the May elections," says Sinha.
The stock markets reacted predictably and the Sensex was down 15 per cent by the end of August. It looked set to erase all gains of 2012, and more.
But just when it seemed that bears had the market in their grip, the balance of power tilted in favour of bulls, the moment Raghuram Rajan took charge as the 23rd governor of Reserve Bank of India, on September 4. A mix of pep talk by the new governor and a slew of measures to stem the outflow of dollars injected life back into the bulls and there was a rally in both rupee and stocks. By the end of October, the rupee had recouped half of losses and stocks rallied. The Sensex made a new lifetime high on December 9 after a gap of over three years and it seemed nothing could stop bulls now. The new high, however, soon became a resistance and nothing dramatic happened.
Bulls and bears settled for a draw and the Sensex ended at the year with gains of nine per cent. Investors just about managed to protect their wealth against inflation, running in double digits. The rupee ended 2013 with a modest depreciation of 13 per cent.
Analysts expect more of the same in the new financial year considering a lack of momentum in corporate earnings and a host of macro economic and political uncertainties, including monetary tapering by the US Federal Reserve, inflation fighting by RBI and the uncertain outcome of the coming Lok Sabha elections.
In calendar 2013, the underlying earnings for Sensex companies was up seven per cent, its slowest pace in four years and less than half the Street consensus estimates. The Sensex companies' combined earnings is expected to grow 16 per cent in FY14 and 13.8 per cent in FY15, according to Bloomberg consensus estimates.
"The advent of QE tapering and expected macro adjustments in India in FY15 will test market exuberance is visible since September. Any mismatch between earnings projections and actuals could trigger market volatility," says Dhananjay Sinha, co-head of institutional equity at Emkay Global Financial Services. He expects India Inc's actual earnings to fall short of the Street's 'optimistic' projections for 2014. (THE OUTPERFORMERS & UNDERPERFORMERS)
Historically, there is a strong correlation between the Sensex and underlying earnings growth. The rally between 2003 and 2007 was accompanied by a high double-digit earnings growth that more than tripled the Sensex's underlying EPS between 2007 and 2002. Conversely, the market meltdown in 2008 coincided with a sharp deceleration in corporate earnings that year. (See chart).
"Most of the macro-economic factors that affected corporate earnings and investments remain unchanged. It ensures indices will be driven by sentiments rather than fundamentals," says G Chhokalingam, an independent analyst.
The biggest uncertainty is the 2014 general elections. If it results in a stable government led by either of the national parties, companies will have an incentive to scale up investments, leading to a faster recovery in GDP growth and earnings. However, if a rag-tag coalition of regional parties (read third-front government) comes to power companies might cut back on big-ticket investments, hurt growth and earnings further.
In 2014, investors also have to contend with what Sinha calls 'reverse-de-coupling' -outflow of capital from slow growing emerging markets to the developed world, where economic recovery is gathering pace. The global portfolio rebalancing will be hastened by the US Fed tapering and could drag down the rupee and the benchmark indices to lower levels.
Others see opportunity in beaten down quality names in capital-goods, media, commodities, power and telecom, among others despite any apparent lack of earnings triggers. "Defensives and export-driven stocks will remain in vogue, given the macro-economic uncertainty. Investors could also accumulate quality stocks, given their low valuations and those that could gain from policy triggers after the May elections," says Sinha.