 "Nilesh Shah")
The Indian equity market is at a crossroads. It will face higher volatility as it steps into 2014. The markets are going to get supported by fair valuations, a shift from physical savings to financial savings, higher exports and steady foreign institutional investor flows. The Sensex is trading at around the average valuations of the past two decades on an earnings basis. This will protect the downside.
India will witness a shift from physical savings to financial savings. Gold has given a negative return, while real estate in many places will probably give a low to negative return in 2015. Domestic savings will flow to capital markets in search of better returns. The rupee’s depreciation has restored the economy’s competitiveness, albeit at a cost. This will provide support to growth through exports, as well as import substitution.
However, the market upsides will be capped by uncertainty related to elections and the country’s fiscal situation. Any deviation from the market expectation of a pro-reform and pro-growth government will cap the upside, as well as create a short-term correction. The fiscal situation for 2014-15 will be a critical factor in influencing the market’s direction. If the 2013-14 fiscal numbers are achieved by deferring expenditures to FY15, then it will get priced in by the market and act as a short-term cap on the upside. Apart from local factors, there will be a host of global factors to watch for in 2014, from US Fed tapering to revival in US growth. After a massive underperformance of several years, mid-cap and small-cap stocks are likely to outperform large-cap ones in 2014. Gold will be a strictly avoidable asset class even after the sharp correction of 2013.
Nilesh Shah, Managing Director and CEO, Axis Capital
