The year 2012 has been an interesting year in itself for the Indian equity markets. After a sharp up-move in the first two months, markets drifted downwards given the global recession, delays in decision making on reforms and the threat of Indias ratings being downgraded. However, in the last two months, the markets have rallied significantly and have provided the much-needed relief to participants.
However, as we near the close of 2012, the one question that dominates our mind iswill this positive upswing continue well into 2013
The new year heralds many new resolutions especially regarding to financial discipline and planning of investments and assets and as such, is the time when we decide, either as retail or institutional participants to participate or not in equity. Given the markets performance so far, here are my views about what we can expect will happen in 2013.
I believe that, there are several factors which point to possible gains in 2013. Having said that, we need to be cognizant of the potential headwinds.
The reasons for such positive expectations are many, starting with the fact that the Indian government, after months of indecision, has started pushing reforms. The fuel subsidy is sought to be cut and FDI in various sectors is sought to be allowed or the respective caps increased. These reforms are a good first step taken by the government, I feel. The government has opened up the doors for more funds to come in. This may help in our funding needs and may also curb rupee depreciation over a period of time. Looking at the current scenario, I expect the government to take up reforms in other areas like insurance, banking, pensions, aviation, etc in the short-term.
The RBI is also looking up to government reforms and concrete action on the same may make the central bank it change its monetary stance in favour of easing. Also, while WPI inflation has remained at elevated levels, the core inflation has been contained at relatively lower levels. If these factors come true, corporate revenue growth and profit growth may be higher in the coming quarters. Consequently, the downgrades might stop atleast and that should be positive for markets.
From a global perspective, the EU problems are well-known and are likely to be discounted by the markets. That economic zone is expected to remain stagnant atleast in the foreseeable future, if not de-grow. However, I do not expect any catastrophes to happen in that part of the world as the leadership seems intent on avoiding the same. To that extent, there may not be any negative surprises from that part of the world. As far as the US is concerned, I believe that, a solution to the fiscal cliff issue will be found in the near-term and the cliff may actually be avoided. These, along with the quantitative easing already announced by EU and USA, should keep the global markets, as well as fund flows into India, buoyant. Consistent inflows from FII will likely have a salutary impact on the rupee, which has been under pressure for some time now. An appreciating rupee may help in reducing our oil import bill, which will be a further positive.
FIIs are looking for opportunities to participate in the Indian growth story given its attractive growth potential amongst BRIC nations and its favourable demographics. In the next 10 years, India is expected to have a strong young working population versus its peers including Brazil, Russia or China. Our savings and investment rates are also among the highest in the world and that should support the future growth of the economy in the medium-term. The fundamentals of the economy look promising. While the performance of the past few quarters may not be much to write home about, the growth of India is better than that of most other emerging economies like Brazil, Russia, etc. that have grown at a much lower pace. Even with a growth rate of sub-6.5% levels, India has a lot of potential and thus remains attractive to foreign investments, especially with the reforms underway.
While these are the structural medium-to-long term positives, India will have to strive hard to revive the growth rate in the short- term also. For that to happen, we need to see more reforms in the core sectorland acquisition, availability of natural resources, fuel linkages, GST, etc. These are the factors which will improve the business confidence and sentiment and lead to further investments. Consensus building may be necessary to achieve these reforms and it is to be seen if the government is able to achieve this consensus. Also, we do have the 2013-14 budget coming up and the markets are expecting some populist measures to be announced. We need to watch out for the same and any significant impact on the deficit may weigh on the market sentiments.
Markets will surely be looking very closely at the government initiatives on disinvestment and also revenues from the telecom licences. If the government exhibits prudence and is fast enough to cash in on market cues, that would help it in its efforts to meet the revised fiscal deficit target. This would be closely watched not just by the domestic participants but also the foreign investors who will wish to benefit from the India story.
For Indian markets, the key to a successful 2013 is sustainabilityin growth, in policy and implementation and in curbing expenses and inflation. The recent action taken by the government is positive but work still needs to be done in terms of further reforms and implementation. I believe that will be the key for the economy and market performance in 2013.
The author is executive vice-president and head (broking), Kotak Securities