The benchmark indices, the BSE Sensex and Nifty 50, have touched their lifetime highs and yet the cheer is somehow missing because the past one year has seen three such "hope rallies". The reason behind this skepticism is that nothing fundamentally has changed for India -- the fiscal situation remains worrying, growth remains anaemic and nobody quite knows how the currency will react if the US Federal Reserve begins tapering its famed fiscal stimulus programme in January 2014. So what's in store for the markets in the coming months?
For starters, since the new tops made by the benchmarks are largely driven by the foreign flows, which have resumed after the US deferred the taper, global factors will play a critical role in driving the markets over the next few months. After the US Fed delayed tapering its bond-buying programme on September 18, foreign investors have invested $3.5 billion in Indian equities. The signals emanating from the West are mixed. While the broadly the market expects Janet Yellen, the US Federal Reserve's new boss, to remain dovish, the commentary appears to be hawkish.
Also the recent jobs data in the US has been better than expected. Corporate earnings in the US have been better than expected, driven by lower borrowing costs and stable wage bill. Standard Chartered Equity Research says US markets have risen moderately after investors digested the possibility that the Federal Reserve may taper its bond-buying sooner than expected after a less-dovish- than-expected statement from the central bank's policy meeting.
Others believe that the constitution of the Federal Reserve is set to change completely and that the transition could be a little messy. Also, Ben Bernanke would want to leave his mark on before leaving and, therefore, kick off the taper before his exit. If this were to happen, the markets may be in for some choppy times in December.
Andrew Holland, CEO of Ambit Alpha Fund, believes that tapering could start in January 2014 at the earliest and could be pushed back if debt-ceiling issue is not resolved. India, Holland believes, has a three-month window to put its house in order before the tapering begins. If some of the domestic concerns are addressed, Indian markets could see the start of another bull run in 2014.
The current market rally is factoring in a clear and strong verdict after 2014's general elections and this hope is driving equities further. The market is now uncomfortable holding expensive sectors like pharma, staples and IT, when so much more is available cheap. Also, the other expectation is that if growth picks up by half a percentage point, then this would have a big impact on earnings of manufacturing companies, which have been functioning at low capacities ever since demand started contracting. Equity strategists are calling this the revival theme. That is betting on too many variables at the same time.