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The market call in 2014 is more challenging for us than we can remember in a while. It requires us to anticipate what the US Federal Reserve will do, second-guess the Indian election results and then forecast the government's policy response. If all three go the market's way, we could be in a bull phase. However, if two of three go against the market, we could see significant downsides to the indices.
Both outcomes are aptly reflected in our risk-reward scenarios for the BSE Sensex, with a bull case upside of 25 per cent and a bear case with a downside of 17 per cent.
The call becomes more complicated because it is an election year and the country needs assertive policy action. Thus, the market could gyrate around election outcomes. We do not see a sustainable shift in fundamentals for us to back stocks which are, at best, trading at middling valuations.
Global liquidity is strong but waning at the margin. Domestic liquidity will improve only when India's savings gap closes. The chances of that happening in 2014 are good, though the extent of improvement might be small.
In our portfolio, we continue to be overweight on technology and underweight on banks. In picking stocks, we are insensitive to cyclicality and are looking for idiosyncratic, reliable growth and reasonable valuations.
Ridham Desai, Managing Director, Morgan Stanley India
