Investors in Indian stocks have entered 2013 in an upbeat mood. All of us know that equity markets can be volatile and treacherous. Therefore, while 2013 can indeed be a year of great opportunities and the beginning of a bull run, one cannot rule out the possibility of crude surprises. Certain events or news can trigger a trend reversal. The five key triggers for the Indian markets that retail as well as institutional investors should watch out for are:
The Joker In The Pack
Whether we like it or not, crude prices are the single-most important factor for the Indian economy as well as the stock markets. If crude prices come down, our inflation and current account deficit come down and fiscal deficit eases as the subsidy burden reduces. This allows interest rates to come down, currency to appreciate, and investment and growth to pick up. All our macro variables start looking better. Crude oil is the largest item on India’s import bill and its demand is inelastic. Therefore, when global crude prices go up, they wreak havoc on India’s economy, balance of payments and government finances. Crude prices are beyond the control of the fiscal and monetary policy. When crude prices fall and ease pressure on inflation and government finances, you will see our policymakers and government officials attributing these to sound policy steps and taking credit for the same on television channels.
With US gas production at a multi-decade high and growing on the one hand, and demand slowing down in the developed world on the other, there is a fair chance that crude prices may drop by $20-30 per barrel in 2013, bringing relief on the deficit and the rupee fronts. If that happens, it will be a huge bullish trigger for the markets.
The developed world — the US, Europe and Japan — seem determined to print as much money as required to keep the demon of recession away. Shinzo Abe, the recently elected Japanese Prime Minister, has set a target to take inflation up to 2-3 per cent per annum, through an extremely easy monetary policy, low interest rates and depreciation in the home currency. Similarly, the US and euro zone have also been following easy money policies, giving rise to extremely benign liquidity conditions globally. Money is like water and will find its way to avenues of higher returns. In simple words, there will be a huge temptation for global banks and investors to borrow in, say, yen and invest in emerging markets such as India. Relatively, India is still a better long-term growth story and will attract flows of global capital. In 2012, many were surprised by the performance of the stock markets that yielded 26 per cent returns. The underlying factor was investment of about $25 billion by foreign institutional investors. Year 2013 can be even better.
A vibrant primary market is the foundation for any good capital market. There are hopes that initial public offerings (IPO) will attract retail investors back to the market. There are a large number of IPO issues in the pipeline. If IPOs are priced conservatively, leaving some money on the table for investors, we will see a host of new individual and institutional investors being attracted to the market. While many market men abhor the supply of new paper, I think the s