QE taper, general elections key for markets in 2014

Top picks - Aurobindo Pharma, Bajaj Finance, Cairn India, Coal India, J.B. Chemicals M&M, Mastek, Max India, RIL and Sesa Sterlite.

It has been a blockbuster 2013 for the Indian economy and the markets. While on one hand rupee’s slide against the US dollar amid the burgeoning current account deficit, elevated inflation and slowing growth cast its shadow on the economy, ample liquidity in the form of US Federal Reserve’s quantitative easing saw the benchmark indices reach new highs after nearly five years.

Outcome of the Assembly polls in December – seen as a semi-final to the General Elections scheduled for 2014 – reinforced hope of wider reforms on the back of change of guard at the Centre.

In this backdrop, export-oriented sectors such as information technology (IT) and pharmaceutical (pharma) emerged as the biggest gainers during the calendar year (CY) 2013. The S&P BSE IT index and Healthcare indices appreciated by 60% and 22% respectively, as against 9% rise recorded by the benchmark S&P BSE Sensex in 2013. The fast moving consumer goods (FMCG) and auto indices gained less than 12%, while the rupee depreciated 12.58% against dollar during the year.

Foreign Institutional Investors (FIIs), the key market driver, bought shares worth $20 billion (Rs 1.13-lakh crore) till December 30. Last year, overseas investors had pumped in $24.37 billion, or Rs 1.28-lakh crore, in Indian equities, data suggests.

Mid-caps lag behind

However, the broader markets have lagged behind substantially with the BSE mid-cap index and Small-cap index fell 6% and 12%, respectively during the year. As per sectoral classification, real estate, consumer durables, power, metal, banking and capital goods sector are the major underperformers in 2013 that declined between 6 – 32%.

“India’s 2013 economic performance has been disappointing and little on the horizon is likely to lift growth. Some of the more pressing downside risks have receded: The current account has narrowed and the central bank is targeting inflation, but structural problems remain,” said Glenn Levine, senior economist at Moody's Analytics.

“Complicated taxes and regulations, weak infrastructure, and a weak central government weigh on confidence and demand. This will turn around eventually, but not in 2014, keeping GDP growth below potential. The May elections open the possibility of better governance,” he said.

Winners and losers

Meanwhile, out of BSE-500 companies, three out of four stocks have underperformed the market by recording less than 8% returns during the year. Of these 374 stocks, half or 267 stocks have declined by more than 10%.

Among individual stocks, HCL Technologies, Aurobindo Pharma, PVR, PI Industries, MindTree, Rasoya Proteins, Finolex Industries, Alembic Pharmaceuticals and Ajanta Pharma have rallied more than 100%.

However, MMTC, Gitnajali Gems, Financial Technologies, MCX, Wockhardt, D B Realty, IVRCL and Jet Airways are among 50 stocks, which have seen their market value erosion of over 50% during the year.

Outlook for 2014

The advent of quantitative easing (QE) tapering and expected macro adjustments in FY15 will contest the renewed market exuberance seen since mid-FY14, analysts say. In this context, optimistic earnings projections for the benchmark indices can trigger volatility going forward.

“We are quite sanguine about the markets over the next eight - 10 month time horizon. Elections are a key event to watch out for the markets and we believe that any government which comes at the centre would be hard pressed to continue with the reforms momentum,” said Kunj Bansal, ED and CIO, Centrum Wealth Management.

“All in all, the macroeconomic environment is poised for an improvement in 2014 which will have a trickle-down effect on micro numbers and will be beneficial for corporate performance. Our top picks include ICICI Bank, ITC, Lupin, L&T, Eicher Motors,” Bansal adds.

Among specific stocks, top picks of Daljeet Kohli, head of research at IndiaNivesh Securities include Aurobindo Pharma, Bajaj Finance, Cairn India, Coal India, J.B. Chemicals & Pharmaceuticals, Mahindra & Mahindra, Mastek, Max India, Reliance Industries and Sesa Sterlite.

Dinesh Thakkar, chairman and managing director, Angel Broking says: “The benchmark indices have made new highs in 2013 and are set for a strong run going into 2014 on the back of supportive global and domestic cues. In light of these positive developments and attributing a 16x multiple to our Sensex EPS, we arrive at a Sensex target of 24,600 in the coming 12 months. Beyond this, I believe that markets are likely to at least give returns in line with the expected 13–15% earnings growth.”

His stock picks for 2014 are Axis Bank, ICICI Bank, Cipla, United Phosphorous and TCS.

Dhananjay Sinha, head of institutional research, Emkay Global Financial Services is overweight (OW) on technology, healthcare, media and telecom. Their underweight (UW) view on banking remains on concerns on asset quality, rates outlook and re-capitalisation of PSU banks.

TOP PICKS
IndiaNivesh Securities	SMC Global Securities	Angel Broking
Aurobindo Pharma	Adani Ports	Axis Bank
Bajaj Finance	Cairn India	ICICI Bank
Cairn India	Crompton Greaves	Cipla
Coal India	Escorts	UPL
J.B. Chemicals & Pharmaceuticals	Essel Propack	TCS
Mahindra & Mahindra	M&M
Mastek	Punjab National Bank
Max India	Sesa Sterlite
Reliance Industries	Torrent Pharma
Sesa Sterlite.	Wipro

Rupee

As regards the rupee, analysts expect increased volatility in the medium-term, as the Indian unit factors in the effect of withdrawal of liquidity from the US Fed next year and uncertainty over course of RBI’s monetary policy.

“We expect, demand from importers and oil marketing companies to remain strong closer to 61.00 on spot, which can cap gains beyond 60.5/61 levels but at the same time, unless and risk sentiments reverses materially in global financial markets, going for US Dollar beyond 63.50/64.00 appears unlikely,” said Anindya Banerjee, currency analyst, Kotak Securities.