Jayant Manglik President-Retail Distribution, Religare Securities

Our equity markets are trading firm due to continuing and strong FIIs inflow as also a stable currency. Both major benchmark indices, BSE Sensex and CNX Nifty, made a new record high recently and are now consolidating their gains. Similarly, other emerging economies have been doing rather well and we are not alone in the uptrend. However, volatility combined with a slowdown in China could impact sentiment at any point. Apart from us, several emerging markets countries have their elections due in 2014. Indonesia, South Africa, Thailand, Turkey, Brazil and Nigeria are some of these. As we know, electoral cycles bring their own level of complexity into markets based on local considerations. There is always the temptation to go in for populist measures at such times but there are exceptions too. India will gain from a stable government, growth potential and favourable demographic trends. An unstable government will negate all other advantages.

 On the earnings front, the results so far announced have been mixed. Among sectors, we see that IT, telecom and private banks have done well but there are several companies who are yet to announce results. Overall, we are sanguine about H1FY15 and a stable government will only help in improving the macro environment as well as giving business confidence that policy decisions will be taken and implemented quickly

Coming to the currency front, the rupee fell to an all-time low last year following dollar outfl ws from emerging market, but has appreciated since with the improvement in current account defi cit numbers. Significantly, the appreciation has been more than 14 per cent from its lows and clearly it is not just a spike. But surely some part of the strength comes from hot money which could flow out just as easily. Likewise, there are global issues which are beyond our control, for example if the US Federal Reserve were to increase the pace of tapering then it will put pressure on the rupee. And indeed, if the US decides to increase interest rates then we could really have a problem in the short term as dollars would fl y out. But there is increasing confidence that the RBI has a backup plan to counter such exigencies.

Ours is a complex situation with a combination of high inflation, falling growth, political uncertainty and governance issues. Our investment cycle too has stagnated and this can be seen from the fall in growth and efficiency as also the frequent interest rate hikes. Political stability will certainly be a factor which could bring back confidence and kick-start the rate cut cycle. In its previous meet, RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8 per cent. The central bank has also indicated that if inflation is under control then interest rates could be capped for now but a clear lowering of interest rates in the immediate future seems wishful thinking.

Our markets have risen with other emerging markets. This makes the outcome of general elections a real trigger and all of it may not yet be factored in. A government with a strong mandate is something that the investors will clearly welcome because it gives hopes that critical reforms will be pushed through and supply constraints will be tackled. These factors have kept inflation high and decisive steps could revive investment and lift growth. Other triggers include RBI’s stance on inflation and interest rates, currency movement and movement in emerging as well as global equity markets. Markets in developed countries are performing well and this points to a clear turnaround there. This trend is likely to continue. Developing countries remain largely susceptible to country perception among FIIs and the resultant flows. But overall there is an undercurrent of optimism and 2014 could well be the year to see across-the-board increases in several markets.

 Among the sectors, NBFCs, private banks and infrastructure look set to cash in on upcoming growth opportunities. We continue to like the IT industry as they are moving up the value chain and the exchange rate is not their sole hope. And of course, all-weather favourites like Pharma and FMCG are near-permanent recommendations for your portfolio because they reduce portfolio risk and volatility.

 The advice to retail investors is that it is best to partially or fully hedge investments using derivative instruments as volatility could be high in the near future as political outcomes will drive markets. Diversification is always an option at such times so that your portfolio contains a good mix of aggressive and defensive counters. And most importantly, avoid the temptation to invest in penny stocks and be focused on fundamentally strong companies.