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Stock investors may have to brace for turbulent times in the year ahead with the the US Federal Reserve starting the rollback of its stimulus, known as quantitative easing 3 (QE3).
Market participants will closely watch the direction of the rupee against the dollar, which is expected to strengthen on account of the $10-billion reduction in the Fed’s $85-billion QE3. A stronger dollar against the rupee could impact inflows from foreign institutional investors (FIIs), which have played a big role in keeping the ball rolling for emerging market equities including India.
Analysts said a decline of 5-8% in benchmark indices cannot be ruled out over the next two months. But, expectations of a steady government coming to power after the national elections in April 2014, considered the most important event for Dalal Street this year, could limit possible declines.
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“There may not be any pre-emptive selling in the market. We would see money going out of the country only after the tapering starts,” said Nirmal Rungta, director and head – private client group, CIMB Securities. Foreign investors have been the highest buyers of Indian equities in 2013, having net-bought stocks worth Rs 1.12 lakh crore.
The US Fed announced its intention to commence with a partial withdrawal of the QE3 programme in its December-month Federal Open Market Committee (FOMC) meeting as the outlook on the US economy improved. A stronger US economy is expected to help the dollar gain against other currencies.
“The tapering of the QE3 could keep the markets volatile in the short-term. The weakness in the market could push the NSE Nifty down to 5900-levels in the next two months,” said Shrikant S Chouhan, senior vice president – research, Kotak Securities. According to technical analysts, the Nifty could trade in the range between 5900 and 6400 in the first two months of the year.
Any fall in the market would be an opportunity to buy said analysts as they believe that the elections in April-May could limit the negative impact of the tapering. In the long-term, participants are hopeful that further downside risk to equities could be capped if the centre sees the formation of a stable government post May.
“The initial impact of the tapering on stocks will be negative. However, going into June the impact would be largely absorbed by the markets if the BJP comes to power, which is what the market expectation is at this point,” said Mehraboon J Irani, principal and head – PCG, Nirmal Bang Securities.
The impact of any tapering announcement in 2014 post elections would be determined by the political scenario in the country. The victory of the Aam Aadmi Party in Delhi had cast doubts of a stable government at the centre, said analysts. In the absence of a stable government, analysts fear that further tapering could be damaging to the markets and see higher outflows from foreign investors.
Market watchers said that the tapering impact could see stocks of interest-rate sensitive sector declining the most. This is because most of the ‘hot’ hedge-fund money goes into these stocks.
“Those sectors which have been laggards through the year like financial services, capital goods and other infrastructure sectors would take a beating due to the currency impact. Tapering could further weaken the rupee prompting the Reserve Bank of India to take corrective measures and perhaps hike rates further,” said Rungta.
On the other hand, the currency impact could see stocks of export-oriented sectors like technology and healthcare gaining further on the weakening currency. These are also sectors where foreign investors have some of the highest holdings as investments from long-term funds are locked in these stocks.
