By Arpit Goel
Looking back at 2014, the stock markets worldwide had a better than expected run. The central banks in US, European Japan continued to rope in investors with their continued money printing exercise. Cheap liquidity ensured that stocks markets soar in valuations. In India, the hopes of reforms attached to the Modi government buoyed sentiments. Sense, the key representative of stocks in India, scaled to its highest mark with average gains of over 30%.
But the important question is will this Bull Run continue in the coming year and how will global standing impact the markets?
In 2015, we might see a turnaround. In addition to foreign investors (FII’s), domestic investments will show different picture altogether. Every industrialist, household and market aficionado is eyeing the forthcoming Union Budget, The government has announced big plans for labour reforms, diesel precede-control; the ‘Make in India’ movement along with progress in GST talks which will increase ease the doing of business and hopefully lead to capital inflow. But whether these reforms are actually supported byte Budget and can be put in action given the political logjam is to be seen.
Thus, the Budget will be an important trigger for the market. For investors who measure their gains/losses inconvertible currency terms, the rupee-dollar exchange rates are important. The FII’s assume the RBI won’t let the rupee weaken in accordance with inflation. However, this can prove risky owing to the recovery in US and sluggish growth in emerging markets. Moreover, India is currently said to be the best market among the BRICS. China has considerably slowed down and Russia has been hit because of plunge in oil prices. Numerous external factors will also affect the markets.
The world economic growth is likely to drop, making Indian exports a little difficult. Second, there is no certainty about the oil prices. The falling prices have shown a good impact on the inflation numbers but there is an underlying threat of deflation. If the Federal Reserve increases interest rates, FII inflows may fall in emerging market economies and check rising equity prices. Besides this, there are chances of a crash in the Eurozone. The deteriorating fundamentals in Japan also pose a risk. In highly integrated global economy, India is bound to feel the impact of any major global risk. Assuming the West keeps on printing more money, foreign money is likely to flow into India for better returns. So in that sense, India will continue to attract capital and this will improve the market growth rate. Now looking at the legendary investor, Warren Buffett’sfavourite ratio i.e. market capitalization to GDP ratio, the future of Indian market looks positive. The change in this ratio, at about 14.6% in 2014, is the highest amongst global markets. Does that mean India has witnessed the bull-run already? No. India’s ratio continues to remain below the world average, and well below the ratios for developed economies like Japan and the US.
Improvement in GDP growth, control over inflation and better earning visibility for Indian companies, will further this ratio for India in 2015.Also, the P/E (Price/Earnings) ratio currently is hovering around the 21 times earnings, which is much above the10-year average of 17.69 times earnings. Though the ratio rose tremendously last year, investors are still willing to give a premium in hope of further growth. The market stills trading at discounts from the 2008 P/E valuations (of 24times forward earnings). So market valuations are neither cheap nor expensive. Other than the above, parameters like the PEG (Price/earnings to growth ratio) are projected to be lower due to higher EPS and faster corporate growth, thus creating enough space for share prices to rise.
Arpit Goel is currently a first year student pursuing Bachelor of commerce( Hons) degree in Sri Ram College of Commerce, University of Delhi. He believes in expression of writing and loves sharing his experience with others.Being a Delhite he loves exploring places and trying different cuisines of food. He is aspiring to be an IAS officer in the future.In his free time he loves reading books, listening songs ( any genre) and watching movies(lots of movies!!!). His interests lie in the area of Indian economy, International relations,financial markets and Philosophy. He can be reached at: [email protected]
Edited by Anandita Malhotra