As you plan your investment strategy for 2014, there will be some key events to watch out for in 2014 that may affect the fate of equity and debt markets one way or the other.
1. General Elections 2014
The general elections have always been a big event as far as stock markets are concerned. In the run up to the elections, one doesn't expect the ruling part to push any big bang reforms. The election outcomes are watched very closely and generally a stable government is given big thumbs up by the market. On the other hand, where no single party emerges a clear winner and coalition is required, it may be looked at skeptically by the markets because the government may not be able to push forth its reforms agenda without having the coalition parties on board.
Indian equity markets have languished in the past 3-4 years on account of low GDP growth, scandals and corruption as well as policy inaction. If a stable government comes to power in 2014, we could see a renewed interest in the equity markets both from domestic and foreign investors. On the other hand, an unstable coalition government or emergence of a third front would not augur well for the equity markets.
2. US Federal Reserve policy on QE3
Quantitative easing (QE) is a monetary policy, a rather unconventional one, used by central banks to stimulate the economy when standard monetary becomes ineffective. The way the central bank does this is by buying financial assets, usually government bonds, which in turn leads to increased liquidity in the hands of banks and hence, increased lending. Post the aftermath of the sub prime crisis in US, it has introduced QE in 3 stages, QE 1 in 2008-09, QE2 in 2010-11 and QE3 in 2012-13. In June 2013, the US Fed Chairman announced the tapering of some of its QE measures, which sent the markets across the globe including India into a tizzy. While on one side when QE is announced it means more money into the emerging markets, QE tapering can cause exact opposite i.e. money flowing out of emerging markets.
Although no one exactly knows when this tapering could start, some bit of the news is actually priced in. Whenever, it does happen though, it would definitely impact the Indian equity markets. So this is one important thing to watch out for in 2014.
3. Inflation and RBI Policy Action
Inflation has perhaps been the biggest headache of the government as well as RBI. Price rise across essential commodities has affected large sections of the society. High inflation has also led to tightening of policy rates by RBI thereby keeping the interest rates in the economy at elevated levels. This impacts the corporate as well as retail borrowers. Although at the last policy meet, the RBI Governor maintained status quo, we may see a further hike in interest rates if the inflation does not come down. This would mean that the short-term rates would remain high. For investors, long-term debt products may not be a wise bet until there is a possibility of reversal of interest cycle. Until then, sticking to short term debt products may be the right thing to do. Inflation levels would be something to watch out for in 2014.
4. Growth rate for India Inc.
Past few years have been quite challenging for India Inc. and that reflects in India's growth rate. High interest rates, lack of focus on reforms by the government, inflation, demand slowdown, faltering global economy has all led to a sub 5% growth rate for India. All the above-mentioned events of 2014 will have an impact on India's corporate sector as well. A stable, reform-focused government and easing of the interest rates will help the sectors that are down in the dumps. Reducing spending and improving cash flows is going to be important for any company to survive this period. Any positive signals and actions, which help the Indian corporate sector to get back on track, will augur well for the equity markets.
5. Real Estate Bill
The Real Estate (Regulation and Development) Bill is a legislation to set up a real estate regulator with the intent to protect home buyers from unscrupulous developers and builders. The Bill, currently being examined by the Parliamentary Affairs Committee, is a first step towards structuring a highly unregulated real estate sector. Under the proposed law, there is a provision for mandatory public disclosure of all project details - of promoters, land status, layout plan, carpet area and status of statutory approvals. If the Bill were to become a reality, before advertising and starting of construction, developers will have to place all details of the project, including mandatory clearances, on the website of the regulator. This bill may change the way we buy Real Estate. Not only will the accountability of the promoter as well as the buyer increase, it will also help reduce frauds and bring in greater transparency in the sector.
Thus, as we wait for 2014 to usher in, let us see what it has in store for us. As an investor, we must stick to discipline and not be too swayed by the events around us because every passing year will bring something new to deal with. Happy New Year!
The article is contributed by Perfios Money Manager.