Will the stock market hit new highs?

Last Updated: Sun, Mar 17, 2013 10:58 hrs

Indian stocks may touch new highs in 2013 as the loose monetary policy of central banks in the US and Europe boosts the prospect of further portfolio inflows.

Higher-than-expected cuts in policy rates by the Reserve Bank of India (RBI) and surprises in companies' earnings could potentially drive more foreign institutional investors (FIIs)' money into the nation, whose equity indices about 7 percent away from their closing highs.

But, the possibility of monetary policy tightening by global central banks later in the year, which could dry up FII inflows, political uncertainty and a weaker rupee against the dollar could keep investors on the tenterhooks during the year.

Rate-setting meeting

In the near term, all eyes are on RBI governor D Subbarao, whose action and remarks on policy rates could determine the market's direction. While the general market consensus is that the central bank will cut repo rates by 25 basis points, a higher reduction could be a trigger for the markets.

"A dramatic cut in interest rates could result in the market seeing a dramatic upside," said Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services. He was speaking at a panel discussion organized by the BSE Institute.

Earnings growth

Even if the RBI does not surprise Dalal Street, some analysts feel the market could drift higher solely on the basis of companies' earnings growth.

"Markets are expected to move in line with earnings which are expected to be in the range of 10-15%," said Andrew Holland, CEO – Investment Advisory, Ambit Capital. "So it wouldn't be surprising if the markets are at 10-15% higher levels than they are today by the end of the calendar year which would mean that they touch new highs," he said over phone to Business Standard.

The Sensex is 1577.4 points away from its peak of 21004.96 which it touched on November 5, 2010. The Nifty hit a high of 6312.45 on the same day and is now 439.85 points off the peak.

Earlier this month, leading global indices including Dow Jones and S&P 500 of the US hit record highs while UK's FTSE and Japan's Nikkei rose to 52-week highs.

Morgan Stanley's managing director, Ridham Desai is betting on a surprise in corporate earnings.

"All the metrics that we track suggest that there will be a big improvement coming in the earnings over the next twelve months," said Desai in the BSE event.

FII flows and deficits

While the government's persistence to keep the current account and fiscal deficits under control will be closely watched, a decline in crude oil prices could be boost also investor sentiment. Brent crude prices have fallen 7.59% from a high of 119.34 per barrel last month.

"The fall in crude oil prices will help our fiscal and current account deficit, and attract a lot more money from FIIs," said Nirmal Jain, chairman of Indian Infoline who also spoke about the likelihood of the market touching new highs at the panel discussion.

FIIs have pumped about Rs51,000 crore into Indian equities so far in 2013, which is about 40 percent of the total FII investments in 2012 of Rs1.27 lakh crore. But despite the flows, the upward momentum has been missing since January unlike in 2012, when indices gained almost 26 percent. This is partly because of selling by domestic institutions and fresh supply of shares as promoters cut stakes. Domestic institutions have been net sellers by Rs.32,626 crore in the calendar year. Brokers said if the global central banks shift to a stance that the current bond buying program to infuse liquidity into their banking system is overdone, there could be a slowdown in FII inflows and resultant reversal in the stock market gains.

Economic slowdown ahead of elections

Some local investors and brokers are of the view that the euphoria surrounding the stocks might be overdone as the economy's main growth engine-consumption- is already slowing led by the government's efforts to cut expenses and tame inflation.

Auto sales suggest that the economy is in deep slumber while the Current Account Deficit and inflation figures suggest overheating, said Vetri Subramaniam, chief investment officer at Religare Mutual Fund.

"…. we are bouncing around rather than having any clear traction either for the economy or the markets," he said.

Ratnesh Kumar, managing director, Standard Chartered Securities does not believe a bull market is nigh.

"It may have been five years since the financial crises started, but I think it is absolutely not the time to lower the guard and say that we are entering another bull market. We are not. It is going to be a while before we get into another high growth phase.

Investors feel it would be important for the government to send right signals to the market especially in the run up to the general elections in 2014. Political uncertainty could make investors nervous.

"If there is a lot of confusion on the political front, it could result in downside," said Agarwal.

Bets in 2013

The stocks to watch out for in 2013 lie outside the blue-chip universe, said fund managers and brokers.

Navneet Munot, chief investment officer at SBI Funds Management said that he is betting on the smaller companies performing better than their large-cap peers.

"Possibility of mid and small cap outperforming is very high. Valuation gap is very high compared to historical average," he said at the panel discussion. "Because of the tight liquidity, low participation of domestic investors and concerns around the macro, corporate fundamentals-people are not looking at that segment at all."

A renewal of interest in the segment backed by participation from domestic investors, could help them outperform, said Munot.

Stanchart's Kumar said it would be prudent to continue focusing on high-quality companies. Analysts said though valuations of companies with a better balance sheet and corporate governance practices are expensive, they could still perform better in uncertain times.

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