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Volatility has returned to financial markets as the US Federal Reserve starts to unwind the largest monetary policy experiment in financial history. It was never going to be a smooth ride, as January’s market turbulence underlined. But with improving prospects for a self-sustaining recovery prompting the Fed’s actions and assurances that interest rates will remain near zero for some time investors should become more comfortable with the central bank’s policies. And turn their focus back to economic and corporate fundamentals and equity valuations. These all look attractive.
Admittedly, China’s slowdown has caused concern, but this should be taken in a positive light as part of the transition to better-quality, more sustainable growth. With global growth on an upward, albeit moderate, trajectory, we expect equities to continue to make advances in 2014 — though returns should be more modest than those of last year. In India specifically, pessimism over the economic outlook has begun to wane as three of the four key drivers — growth, inflation and the current account and fiscal deficits — have turned more positive in the last few weeks. The more favourable (twin) deficit outlook, with a projected deficit of seven to 7.5 per cent in 2013-2014, down from 9.7 per cent in the previous year, has averted a sovereign rating downgrade for now. At the same time, greater currency stability and weaker global commodity prices should at least stabilise inflation, and may even reduce it — potentially allowing for monetary easing in the second half of the year. The removal of political uncertainty, following impending elections, can also result in more helpful fiscal policies and a revival in the investment cycle through the removal of structural impediments.
On the political front, the latest opinion polls suggest the National Democratic Alliance (NDA) coalition has the advantage currently. However, the situation remains fluid and three months is a long time considering the dynamics of Indian politics. That said, the outcome is probably the least uncertain among the emerging countries headed into elections in 2014 — Indonesia, South Africa, Brazil and Malaysia — which may factor into investor considerations in the next few months. Foreign investor flows have been muted so far this year, reflecting reduced appetite for emerging-market assets generally, though this should improve amid India’s more credible monetary policy, a more stable domestic currency, relative improvement in fundamental factors over other emerging economies and supportive valuations.
The current earnings season has seen analysts raising profit estimates for companies at their fastest pace since 2007, amid growing confidence that the economy will rebound from its slowest growth for a decade. Equity valuations remain at a discount to historical averages, with the Nifty trading on a price-earnings multiple (P/E) of 12.5 times forecast earnings for the next 12 months, against a ten-year average of 14.2 times. Attractive valuations, a pick-up in earnings momentum and easing uncertainty over the outcome of the election augur well for equity performance, hence we suggest investors to build an overweight position in equities.
On the basis of the performance of equities in the earlier election months (in May 2004, May 2009), we might witness equity indices rising to new highs. We expect equity to rally with uncertainty of election outcome receding and stability in governance emerging in the near term. We also expect improved momentum from underperforming cyclical sectors, namely utilities, materials and industrials, given the expected post-election pick-up in investment.
The author is chief investment officer, RBS Private Banking, India
Admittedly, China’s slowdown has caused concern, but this should be taken in a positive light as part of the transition to better-quality, more sustainable growth. With global growth on an upward, albeit moderate, trajectory, we expect equities to continue to make advances in 2014 — though returns should be more modest than those of last year. In India specifically, pessimism over the economic outlook has begun to wane as three of the four key drivers — growth, inflation and the current account and fiscal deficits — have turned more positive in the last few weeks. The more favourable (twin) deficit outlook, with a projected deficit of seven to 7.5 per cent in 2013-2014, down from 9.7 per cent in the previous year, has averted a sovereign rating downgrade for now. At the same time, greater currency stability and weaker global commodity prices should at least stabilise inflation, and may even reduce it — potentially allowing for monetary easing in the second half of the year. The removal of political uncertainty, following impending elections, can also result in more helpful fiscal policies and a revival in the investment cycle through the removal of structural impediments.
On the political front, the latest opinion polls suggest the National Democratic Alliance (NDA) coalition has the advantage currently. However, the situation remains fluid and three months is a long time considering the dynamics of Indian politics. That said, the outcome is probably the least uncertain among the emerging countries headed into elections in 2014 — Indonesia, South Africa, Brazil and Malaysia — which may factor into investor considerations in the next few months. Foreign investor flows have been muted so far this year, reflecting reduced appetite for emerging-market assets generally, though this should improve amid India’s more credible monetary policy, a more stable domestic currency, relative improvement in fundamental factors over other emerging economies and supportive valuations.
The current earnings season has seen analysts raising profit estimates for companies at their fastest pace since 2007, amid growing confidence that the economy will rebound from its slowest growth for a decade. Equity valuations remain at a discount to historical averages, with the Nifty trading on a price-earnings multiple (P/E) of 12.5 times forecast earnings for the next 12 months, against a ten-year average of 14.2 times. Attractive valuations, a pick-up in earnings momentum and easing uncertainty over the outcome of the election augur well for equity performance, hence we suggest investors to build an overweight position in equities.
On the basis of the performance of equities in the earlier election months (in May 2004, May 2009), we might witness equity indices rising to new highs. We expect equity to rally with uncertainty of election outcome receding and stability in governance emerging in the near term. We also expect improved momentum from underperforming cyclical sectors, namely utilities, materials and industrials, given the expected post-election pick-up in investment.
The author is chief investment officer, RBS Private Banking, India
