To quote economist Herbert Stein: "If something cannot go on forever, it will stop." Monetary easing in the developed markets is bringing gusts of liquidity to all shores. If one assumes quantitative easing, perennially low interest rates and zero inflation cannot last forever, sometime then, the party of almost all markets near their highs, has to stop sometime.
There is little evidence the ghosts of the past have been or are on the course of being tamed. Be it the risk of sovereign defaults, Euro zone issues, the UK slipping back into recession, US revival of growth or the domestic issues of the twin deficits, slowing savings and consumption, persistently high inflation, stalled investment cycle, rising non-performing assets of banks and a difficult environment for growth.
The Indian market was among the best performing in CY12, returning 26 per cent. This year, despite a gush of $4 billion of foreign institutional investor investments in January 2013, we are lagging world markets. The Sensex is up 1.8 per cent versus the US Dow 3.3 per cent, London FTSE 5.3 per cent and Nikkei 4.7 per cent.
The Indian market has moved into a zone where the risk-reward ratios are getting weaker. Now, the theory of great migration is being thrown around to explain how money is moving from bonds to equity and the reason 2013 might be a year of equities. No evidence suggests this might be happening yet. However, US equity funds have collected $30 billion in three weeks of January, more than in any full month since 2006. The Indian retail aversion to equity is near-total and there is no sign of mood reversal. It looks like Indian markets could return 10-15 per cent this year but might get decoupled and lag the developed markets and China.
The market might slip near or just after the Budget. We expect the first quarter of this calendar to be soft. The next three might look better on the back of the government walking the talk on deficits, reforms and expenditure control.
We like BFSI (banking, financial services and insurance), oil and gas, information technology, two-wheelers, mid-cap pharma, media and telecom as broad sectors. However, a broad brush theme is unlikely to emerge and winners will be individual stocks and their performances. And, like the previous year, it may continue to be a sector-agnostic and a stock-specific market.
While a softer interest rate environment might play out, given the slowdown in deposit growth and demand being higher than supply, borne by the queue of banks on the Reserve Bank of India repo window, there might not be a material reduction in interest rates. For, this could affect the net interest margins of banks, which they can ill afford. Given India's current account deficit and inflation differential, by the end of the year there could be a sharp depreciation of the rupee, in which case gold will continue to glitter in the Indian portfolio. Crude oil has been quiet for long and could be the joker in the pack.
The risk-off button is not located too far from the risk-on button currently on. Investors would do well to remember Voltaire, "Doubt is not a pleasant condition but certainty is absurd." He could well have been describing the times we live in.