Actions by govts to influence markets in a big way in 2014

While Fed's move on the QE taper will rem-ain a concern, the way emerging markets respond will determine capital flows

Calendar year 2013 has been a roller-coaster ride for India’s financial markets. After hopes of a recovery in the second half of the financial year, the markets went into a tailspin after May, as economic growth picked up in the US and the Federal Reserve started making noises about cutting back on its bond-buying programme known as quantitative easing. Although not a lot has changed since then, emerging markets have been given some time to readjust their balance sheets and external accounts. As the year comes to a close, the big question on taper remains, but the world at large is relatively more stable than it was a few months ago.

So, what’s in store for the financial markets in 2014? Without a doubt, the Fed’s taper sword will continue to direct the direction of markets. Other than this, government interventions, be it rate action or reforms, will influence economic growth in a very big way in 2014. Over the six years since the financial crisis broke out in 2008, governments have taken various steps to combat the downturn and its aftermath. India, too, is grappling with similar structural imbalances. HSBC Global, in its report on global equities outlook for 2014, says six years after the global financial crisis, governments continue to interfere in markets, creating potential winners and losers. One of the big trends in 2014 will be that equities will not be driven by multiple expansion, thanks to sloshing liquidity. The focus will shift back to earnings in 2014. Given that Indian companies are unlikely to witness any major recovery in growth, revenues will grow at a very muted pace. So, earnings performance will depend on how margins behave.

Global equity experts are now looking at stocks and sectors that have so far underperformed the indices as the traditional heavy weights appear to be very expensive. Another big trend in 2014 will be the revival of economic growth in developed countries and its cascading impact on developing economies such as India where exports will pick up. This, coupled with benign commodity prices, should come as a boon to Asian economies. However, India will continue to be restrained because of higher interest rates. According to Goldman Sachs, higher global interest rates and slowing domestic credit creation are likely to weigh on growth in several south and southeast Asian countries. The foreign brokerage’s growth forecast for India is below consensus.