Column: Bonding with equities

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SummaryAll signs point at a move from investigations to investments, from bonds to equities, this year

The year past, 2013, has been a trying one for India—maybe 13 is an unlucky number! I do not remember many such years in our history. Thankfully, the year has come to an end, and having bid adieu to 2013, we can heave a sigh of relief and take comfort that we got through it without too much damage. Right now, as we start with 2014, there is a sense of comfort and optimism in the air, as on many fronts things are looking up. In 2014, I expect to see to a few trends that will be substantially different from last year.

First, this will be the year when India moves from investigations to investments. We have spent the last couple of years ‘investigating’ all sorts of things—decisions made by the government, corporate deeds and misdeeds. The focus till now has been on looking back—and this should shift to looking forward. Already the government is removing hurdles to obtaining clearances (especially environmental) and RBI is taking a series of measures to revive confidence; we should see some pick-up in investments. Though cautious and tentative, the focus will be on capacity creation.

Most corporates and investors are fatigued by the constant pessimism and are now looking for positive trends. In the last couple of months, there was a sense that India went through a crisis—the rupee fell to almost 70 to the dollar and has only recently climbed back from the abyss. Investors have started becoming cautiously optimistic and this should continue through 2014.

In the year ahead, equities will be centre-stage again. Last year, the focus was on interest rates, commodity prices and currencies. We were all watching macroeconomic parameters—this will, in 2014, shift to more micro factors. During bear markets, investors worry about macro factors, and in bull markets, investors celebrate micro stories. Indian investors will return to the equity markets in 2014. For the last five years, Indian investors have deserted equity markets. As FIIs have been buying Indian stocks, we have seen local investors—both individual and institutional—selling shares in large quantities. Equities are now very under-owned in Indian investors’ portfolio. As bond yields—both locally and internationally—stay elevated in 2014 and with commodity prices declining, investors will move from bonds to equities.

Globally, the reallocation from bonds to equities will continue. The US 10-year bond yields have crossed 3% recently and will inch closer to 4% through 2014. This

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