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Lucklustre year for investors

Mumbai, Dec. 31: It hasn’t been a razzle dazzle year for the stock markets.

On Tuesday, when the bellwether indices closed at the end of a desultory day of trading, investors and stockbrokers had no real reason to take out the bottles of champagne and wear funny hats to ring out another year.

The bean counters had reason to despair: the 30-stock Sensex rose by a modest 9 per cent while the Nifty Fifty was less than spry recording a gain of just 6.8 per cent from the close of trading on the same day last year.

There is a grim paradox here: the modest gains in the yearly gains in the two broad indices comes just a month after they scaled their life-time highs as FIIs poured $ 20 billion into equities this year. The Sensex and the Nifty had recorded hefty gains of 28 per cent and 26 per cent in 2012.

The sombre mood in the market reflected the tensions and uncertainties that the market had to wrestle with all year. In May, the US Federal Reserve announced that it would taper its bond-buying binge and it pooped the party around the world. The news hung over the hung market until the Fed finally decided to scale back its bond purchases by $ 10 billion to $ 75 billion from January. Markets reacted violently to the first announcement but merely shrugged off the second. The Fed action may force the foreign institutional investors to scurry back into the safe haven of the US but that isn’t what the markets expect.

But the bigger worry at least domestically is the wretched set of economic forecasts that the pundits have put out. EGDP growth this year won’t top 5 per cent and could actually be lower than last year’s revised number of 4.96 per cent. The Planning Commission put it at 4.6 per cent which would make it the lowest growth in 11 years. In 2002-03, economic growth had slumped to 3.99 per cent.

Inflation is another bugbear with the November consumer price index (combined) showing it at 11.24 per cent. Both the economists and the Street reckon that it will come off the peak as food inflation comes down but it doesn’t soothe the worries of investors who feel they are falling behind the yield curve. And that’s one reason why they haven’t risen to the bait of the inflation-indexed bonds.

Finally, high interest rates have stalled corporate investments and gouged profit margins.

Still, the market mavens are cautiously optimistic about the outlook for 2014. The expectation is that inflation (particularly food inflation) will head lower in the coming months and this could see some relief coming on the interest rate front.

Although experts agree that the upcoming general elections will bring its own set of uncertainties and investors will remain guarded till they know the poll outcome, they aver that stock prices could fly if there is a stable government at the Centre, triggering greater FII participation in the local bourses.

“In all likelihood, the tapering by the Federal Reserve will be a gradual process and this will see the continuation of FII flows. There are other positives as well; inflation here in India could head lower. Moreover, the economic recovery in the US is also good news as it will benefit export-oriented sectors like IT. Moreover, there could a strong push to reforms if there is a stable government at the Centre. All in all, 2014 will be a prosperous year for equities,” Alex Mathews, head of research at Geojit BNP Paribas, told The Telegraph.

Mathews expects the Nifty to touch 6500 levels by the short-term and cross 6800 over the medium term.

Market circles, however, admit that bringing retail investors back into the equity markets will remain a challenge in the new year. When the indices hit their life-time highs in 2013, the retail investor prefer to sit out the rally. Analysts here added that retail participation could see an increase if mid-cap and small-cap stocks perform well and if there are a few successful IPOs that are priced attractively.

In 2013, the BSE Mid-Cap index lost nearly 6 per cent of its value and the Small-Cap index tumbled 11 per cent. It was also a year that was marked by strengths in select pockets that particularly included IT and pharmaceuticals as these sectors benefited from the depreciation in the rupee.

The Indian currency lost nearly 11 per cent during the year and its fall came as a boon to these export-oriented sectors. Stocks like HCL Technologies, Tata Consultancy Services, Sun Pharmaceuticals, Lupin and even Infosys became the favourite stocks of investors as they gave superior returns vis--vis the benchmark index.

The full impact of the economic slowdown was felt in the arena of banking, infrastructure, metals and realty stocks that underperformed the indices. In the banking pack, the PSU banks were the worst affected as investors exited these counters as their bad loans surged.

Opinions vary among brokerages as to the sectors that could rally in 2014. Although the IT sector led the list of gainers in 2013, analysts are of the view that one should still not write off the sector as the recovery in the US will benefit companies like TCS, Infosys and many others.

“With interest rates not expected to increase a lot, we have turned positive on interest rate sensitive sectors like banks and automobiles. Public sector banks are trading at quite cheap valuations and we expect significant outperformance from that space in the next two to three years. We expect export oriented sectors like IT to continue to benefit from the significant rupee depreciation seen this year. Telecom is another sector which might deliver strong earnings due to return of pricing power and reduction in competitive intensity,” Varun Goel, Head PMS at Karvy Stock Broking, said in a note.

Analysts are also bullish on the prospects for Reliance Industries Ltd (RIL). They believe that the stock could surprise on the upside in 2014 as the company could benefit from higher gas prices.

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