Due to the events taking place at the moment and not discounting those that have occurred in the recent past, 2014 is looking like a very interesting year already. India will vote in what is touted as one of the most important General Elections in her 66 year history. Analysts have been diligently at work trying to gather the various permutations and combinations about the result of these elections as they’re critical as far as investments go. This is because any political uncertainty brings with it an economic uncertainty. With the new LokSabha being constituted on the 1st of June, uncertainly in the five months preceding it could spell trouble for the markets.
The following could have substantial influence over stock markets in 2014:
The 2014 General Elections:
The General Elections this year bring a lot of hope with them; they are critical as far as policy direction is concerned. A government that would encourage faster economic growth and one that does, or at least attempts to rein in the fiscal deficit is what investors are praying for. If the new government announces measures to cut non-plan expenditure, it would be cheered by the market. This is because the government borrows more money from the market in times of large deficit. As a result, businesses have less money to invest for growth, expansion and acquisitions. The hope with this election is that of a government that boosts its income and curtails the non-plan expenditure.
Corporate profits:
Most analysts are in a fix on predicting how companies would fare this year on account of policy uncertainty. In spite of this, there are certain sectors which are expected to do well on account of tailwinds. Sectors which do not depend on Indian consumers and corporates and get the bulk of their income through foreign currency are expected to blossom this year. The American Economy will bounce back with a bang, and growth is touted to be hugely positive. As a result, companies in the IT sector and pharmaceutical sector that focus on exports to US could do better in 2014. But, with a stable government, sectors such as infrastructure could do really well as their valuations are relatively low right now.
Benchmark indices like S&P, BSE Sensex and CNX Nifty have risen by around 5% over the last quarter. The financial performance of companies in September 2013 quarter surprised positively. This improves prospects for better profit growth for companies in 2014.
Inflation and Interest rates – The Area of Concern:
Inflation and its impact on interest rates is an area that people in the finance sector are well accustomed to by now. Under RaghuramRajan, the Reserve Bank of India’s mid-quarter credit policy statement on Wednesday announced no change in benchmark interest rates contrary to an expectation of a hike. The Central Bank expects the WPI and CPI inflation are expected to come off due to moderating prices of vegetables. The core inflation has not really come down by that great extent; it stands at about 8%. With a fall in food prices and moderation in core inflation, RBI could possibly hold or reduce interest rates in future.
Liquidity:
The liquidity that’s come in from FII’s (More than $18 billion through the secondary market route) has been one of the reasons why markets have remained optimistic in 2013. There is uncertainty on how these will shape up for the future with the US Fed announcing the taper program. The Rupee on the other hand is not totally vulnerable to any impact the taper might have on it; the Forex position of India has become stronger. Even so, the markets will be quite sensitive to the direction and velocity of these flows going ahead.
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