We started 2012 with uncertain global macros continued with high inflation and high interest rate scenario besides uncertain political environment.
Through the year growth expectations were cut and inflation expectations revised upwards leading to the Reserve Bank of India.
RBI refraining from lowering rates.
Yet India has been one of the best performing markets in 2012 with 25 per cent year-to-date returns.
Since the economic fundamentals have not seen any major improvement valuations are not as benign as at the beginning of the year.
However 2013 could witness a reversal of economic fundamentals and the markets could surprise on the upside.
The main driving theme of 2013 is likely to be recovery in growth both at the macro and micro levels.
We believe gross domestic product growth at 53 per cent in Q2 would have reached a trough and expect it to improve to 64 per cent in the fourth quarter.
We see four key drivers for the markets.
First the government action on fiscal consolidation revival of investments and reforms.
The slew of announcements made in September followed by approval to foreign direct investment FDI in retailing and the proposed National Investment Board have partially boosted investor confidence.
The government now seems to be committed to reviving the investment cycle.
To this end we look forward to other policy measures like the land acquisition and mining Bills.
We believe that fiscal consolidation might be another focus area for the government Measures like the Direct Taxes Code and Goods and Services Tax could help improve the revenue stream in the coming years.
Second after a 50 bps cut in the interest rate in April RBI has been hawkish through the year.
Growth has slowed considerably enough for the RBI to consider supporting a revival in the economy.
While inflation remains above RBI comfort zone it has slowed.
Core inflation at 5-55 per cent and food inflation also coming off could be comforting for RBI.
Thus RBI has hinted at possible rate cuts in Q1CY13.
We expect a cumulative 100 bps rate cut by the quarter after that.
Thirdly the global macro-economic backdrop has eased considerably.
Thus while we have not seen a complete resolution of all the macro challenges there are relatively less fears of a sharp slowdown in global growth as compared to those at the beginning of the year.
Some of the encouraging news includes growth revival in the US.
Similarly the Chinese economy has exhibited signs of stabilisation in recent months.
The situation in Europe too has seen marked improvement.
Thus even while growth might not bounce back immediately in Europe the financial contagion seems contained.
Last liquidity has been a major theme of 2012.
With the developed economies announcing quantitative measures to support economic recovery currency circulation has seen a measurable improvement from 2008 levels India too has benefited from this liquidity with the Sensex rising on the back of foreign institutional investor inflows of 20 billion.
There have been concerns on reversal of flows.
However we believe equities as an asset class will continue attracting higher inflows due to reasonable valuations and relatively better growth prospects.
To sum up we maintain a positive view on equities.
Coupled with the bottom-up approach to stock selection this is likely to provide attractive returns over the next 12-18 months.