A transition year: Sanjeev Prasad

Stable govt after 2014 LS polls, continuation of economic reforms critical for market's performance in CY14, FY15

2014 is likely to be a transition year for Indian politics, the economy and stock market. While national elections in 2014 will see a new government, the steps taken by it on economic reforms—fiscal consolidation and the investment cycle—will determine the pace of economic growth over the next few years, which will drive the market’s performance in 2014 and beyond. The formation of a stable government after the 2014 national elections and continuation of economic reforms is, thus, critical for the market’s performance in calendar year (CY) 2014/financial year (FY) 2015.

However, the market has partly factored in the formation of a stable government after the elections and continuation of economic reforms. The Sensex is trading at 14.2 times FY2015’s estimated earnings per share (free-float basis), leaving little room for disappointment on economic reforms and earnings (13.5 per cent growth to Rs 1,487 on a free-float basis for Sensex). Thus, the market will return 10-12 per cent in 2014 if expectations of a progressive and stable government play out but can fall 15-20 per cent if the elections result in a fractured mandate, with neither the BJP-led NDA nor the Congress-led UPA forming the next government.

Even assuming a stable government, CY2014/FY2015 will see a modest economic recovery (5.1 per cent GDP growth), given the several constraints — continued high inflation, anaemic job creation and fiscal tightening.

The key investment themes for CY2014/ FY15 will be improved governance, domestic fiscal consolidation and global economic recovery. Three sectors will benefit. First, energy, where lower diesel subsidies from continued diesel price increases on a monthly basis (50p a litre) can translate into lower under-recoveries and higher net profits for public sector companies in the segment. Second, information technology, where strong global GDP growth in general and in the US in particular will result in Indian companies delivering strong volume growth. Third, telecom, where rapid consolidation and regulatory clarity will translate into a better pricing environment for well-entrenched incumbents.

Sanjeev Prasad, Co-Head, Kotak Institutional Equities