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The year 2014 could be a better year in terms of the market returns. However investors will have to be watchful of key risks such as general elections and impact of tapering next year. To understand these risks and find investment opportunities next year, Jitendra Kumar Gupta, spoke with Paras Bothra, VP, Research, Ashika Stock Broking. Excerpts:
What are your expectations of the markets in the year 2014? Do you think we can continue to trade higher?
First half of 2014 will be highly volatile for obvious reasons like the legislative election, expectation of monsoon and tapering effect of US Federal Reserve. But the yearend will be 7000 plus in Nifty, on back of growth returning, interest rates coming lower and inflation remaining benign. Serious outperformance of the market hinges upon the legislative election results and monsoon. At present if we look Nifty as a absolute number, index may look too high but from a valuation standpoint, we are trading at 14 times one year forward price to earnings ratio and other valuation metrics like the price to book, dividend yield and earning yield to bond yield ratio, Nifty is trading below its long-term average multiples and hence remains undervalued. Expansion of valuation metrics will be the key driving force and those will come back once the companies start delivering growth at 15% plus i.e, above the average nominal GDP growth potential.
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We think, Information Technology will be the biggest outperformer for calendar year 2014, which seems to be completely insulated from vagaries of domestic turbulences if any. We think that with US growth coming back, will benefit IT companies the most.
As the discretion spending power comes back with the multinational companies on better growth prospect, IT spend by the companies will rise and pricing power will come back for Indian companies. Along with it, INR settling at newer levels is a added boon to the IT companies. If incase any untoward economic development happens in the domestic space (whether it is political uncertainty, or lack of reforms, or tapering of bond purchase programme leading to flight of capital and risk averse) the direct impact will be the weakening of INR which will benefit IT companies the most. So, US growth picking up will lead to increasing business volume along with operational efficiencies and uncertainty in domestic market if any will lead to weakening of INR which will again be beneficial for IT companies. More importantly along with all these factors, IT companies across the sector is reasonably valued hence gives you ample amount of margin of safety. Infosys looks to be the star performer for calendar year 2014.
Do you think there is a chance for some of the beaten down sectors to actually do well next year? What are the key triggers?
There is a high chance of beaten down sector to do well if the interest rates comes down significantly and hits a trough. As the beaten down sectors are the one with high leverage and hence, lower interest cost will give them a breathing space and at the same time economic recovery will again give them a fresh lease of life in terms of their optimism in the business. A strong and stable government in the centre will be the driving force to reckon with for any meaningful changes in the economy. Otherwise the underlying economic recovery which we are witnessing right now will be fragile and nimble footed.
Going ahead what are key risks to this market rally in 2014?
The biggest risk seems to be the coalition government elected in the centre in May’2014 and US recovery faltering may as well lead to flight to safety.
Do you think general elections next year could be one of the risks to watch and how do you expect the markets to react in different scenarios of the election results?
A strong and stable government is the desired outcome. BJP coming with full majority will be the ideal one for the market and the economic recovery. A coalition government will be the biggest risk to economic recovery and hence market will dislike and drive down the market on this outcome. Generally early stages of any economic recovery or an emerging bull market coincides with political uncertainty, high NPA’s in the banking system, weak currency and high inflation and low retail appetite for investing in stock market. This time its nothing different.
