Market behaviour rarely conforms to consensus for long

2015 should be a happy year for investors. But don't be terribly surprised if it is not

Most investors in Indian equity expect corporate earnings growth to accelerate in 2015-16. Most investors in the US expect EPS acceleration. Most investors in the euro zone hope earnings will not decline. Investors are also pessimistic about Japan, China, Indonesia, Russia, Brazil and South Africa. The American economy is growing. The growth story has led to a strong dollar and this could strengthen as US interest rates rise. Hence, it would be reasonable for Indian investors to focus on exporters with an American focus such as (IT/ITeS and some pharma companies to do well. At the same time, exporters with a focus on the euro zone or other regions could see a slowdown. The relative strength or weakness of the rupee, versus other emerging market (EM) currencies and even versus hard currencies will make a difference to exports. Energy and fuel prices - crude oil, gas and also coal - are likely to remain down through 2015. This gives the government time to straighten subsidies and distortions across the energy and fertiliser sectors. Refiners should gain, and PSU producers gain because they will not have to shell out high subsidies. Successive Indian governments have wasted chances to put energy and fertiliser policies on firm footings. There are no guarantees this chance will be taken.

If the government finds sustainable permanent solutions to stem huge losses in the power sector, and engineers a turnaround in thermal generation, that would be a fantastic outcome. But it might not happen. There could be speculation on this theme and there will be trading opportunities at least.

More reliably, energy-dependent businesses will see cost reductions. In contrast to conventional energy, the renewable energy sector could see dwindling of interest. It will require strong policy support from the government. There is a good chance because policy has been consistently pro-renewable energy. "Everybody", meaning a majority of analysts, investors and policymakers, expects rate cuts from RBI through 2015-16. There has already been a lot of investment into banking and non-banking financials. There could be new opportunities in debt funds focused on medium-term and long-term debt if a series of rate cuts is executed. Obviously, rate-sensitive stocks should gain because interest costs will decrease if rates drop.

On the flip side, the possibility of certain scenarios should prevent hyper-optimistic assumptions. The Nifty rose 32 per cent in calendar 2014, by six per cent in 2013, and by 28 per cent in 2012. None of those years saw great corporate performance. This bull run is on the basis of future expectations.

There could be profit booking even if that recovery does come in 2015-16. Investors don't wait indefinitely for profits. Expectations might not be sustained for a fourth year if there isn't commensurate EPS performance. Also, the 2014 return was driven by FII (foreign institutional investor) buying (nearly Rs 1,00,000 crore), which far outpaced domestic institutional selling (Rs 30,000 crore).

FIIs must keep faith with India in 2015 for the market performance to be sustained. Most EMs will do badly in 2015. India could be badly affected if the FII sentiment about emerging markets deteriorates. India will certainly be badly affected if the government doesn't deliver, at least in part, on reforms. On the valuation front, the index PE is at around 21 (last four quarters) at the current levels of Nifty 8300. The average Nifty PE since 2009 is 19.5, with a standard deviation of 2.6. The index valuations are on the higher side of historically acceptable levels. Given the mean-reverting nature of market valuations, there are statistically larger chances of a correction than of a rise.

Other issues could be about global themes. If US gross domestic product does not grow as projected, or if other regions have very negative performances, there could be global corrections. There could also be corrections if crude oil prices spike up on fears of supply disruption. Many major crude suppliers such as Russia, Iraq, Venezuela, Iran and Libya are politically volatile. There is also the chance that Opec will cut production to force crude oil prices up. In addition, of course, there are hard-to-price negative possibilities like a big terrorist strike somewhere or assassination of some world leader or sudden deterioration in the geopolitical environment. Nobody is expecting a correction in 2015. That, in itself, is cause for nervousness. While positive EPS growth is indeed likely to be the broad theme in India, market behaviour rarely conforms to consensus opinion for very long. I hope it will be a happy 2015 for investors but don't be terribly surprised if it is not.