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Financial year 2014-2015 was a year of big gains for equity investors. The BSE 200 Index ended the year with gains of 32 per cent, the best in five years, giving handsome returns to many investors (see chart). But index returns mask individual stock performances. Many leading stocks in sectors such as energy, metals, infrastructure and public sector banks witnessed a sharp decline and their stocks prices hit fresh lows. This divide is likely to persist in the new financial year given growth headwinds.
Interestingly, the equity segment did well despite modest participation by foreign institutional investors, which bought more bonds and debt instruments than equity last year. In all, foreign institutional investors (FIIs) invested $33.2 billion in Indian debt (the highest in at least six years), nearly 50 per cent higher than their equity investments ($22.7 billion) in 2013-14. In comparison, their investment in equity was lower than the previous highs in FY11 and FY13. (WINNERS & LOSERS)
This raises the possibility of a fresh FII-driven rally if they book profits in the debt market and deploy the money in the equity market, once the Reserve Bank of India starts cutting rates. Last year, the rally was driven by domestic investors to a great extent. Equity mutual funds received fresh inflows worth nearly Rs 57,000 crore in the first 10 months, the highest ever surpassing the previous high of Rs 47,000 crore in FY07. This broadened the rally.
If domestic investors maintain their bullish stance and FIIs increase their investments, FY16 could prove even better. "FII inflows are likely to be much higher this year, given the more favourable risk-to-reward ratio in India than competing markets. The India story is getting strength from favourable macroeconomic fundamentals such as a stable exchange rate, low trade deficit and all-time high forex reserves," says G Chokkalingam, chief executive officer, Equinomics Research & Advisory.
Others see India in a long-term structural bull-run. "I believe India is in a long-term structural bull-run that will last at least another three years and even more, if economic growth and corporate earnings recover," says Devang Mehta, senior vice-president and head (equity sales) at Anand Rathi Financial Services. He is encouraged by the benign liquidity situation globally and positive investor sentiment.
The only worry is the expected rate rise by the US Federal Reserve and India Inc's inability to live up to market expectations so far. A rise in interest rates in the US could potentially suck out capital from emerging markets leading to a sharp market correction. India, however, seems better prepared for a monetary tightening by the US Fed than in 2013, thanks to a much lower current account deficit and record high forex reserves.
This brings corporate earnings into focus. The bulk of the rally so far has been accounted by an expansion in the price to earnings multiples rather than earnings growth, making India one of the most expensive markets in the emerging world. The disconnect is not sustainable and a disappointment could spoil the party. There is hope that corporate earnings will start improving from the second half of the current financial year after nearly half a decade of slump.
However, this doesn't mean any stock in your portfolio would do well. As last year, the divide between out-performers and laggards is expected to grow. The winners of FY15 were pharmaceutical stocks, private sector banks, non-banking finance companies, automobile and select names in consumer space. Experts expect these sectors to outperform in FY16 as well, backed by better earnings growth.
"A bottom-up approach will work the best and markets will reward stock pickers rather than momentum traders," says Mehta. So, hang on to the quality stocks in your portfolio and weed out the bad apples.
