The Sensex and the Nifty rose 30% and 31% respectively to record high levels in the year 2014. Will the indices continue to scale new record high levels in the year 2015? What factors would drive the growth for Sensex and Nifty in the year 2015? The answer is that the Indian benchmark indices would continue to move higher but volatility will be higher due to factors such as overall slowdown in global growth, structural issues in the Eurozone and Japan coupled with collapse of commodity driven economies and weak China growth.
The Road Ahead
The economic environment continues to improve for the Indian economy with drastic reduction in the inflation levels, lowering of current account and fiscal deficit along with a stable Government elected at the Centre in the month of May 2014. The corporate earnings have grown at a decent pace in the year 2014 and economic reforms that are expected by the BJP led Government can propel the next level of growth. The path of growth is fraught with risks arising from some of the World economies and as such would keep the markets volatile going ahead in the near future. US, India and China are expected to show growth relative to other economies but if major economies flounder it will hurt relatively better off economies. Read our Report on Fixed Income Investment Strategy for Indian economic trends.
Unstable growth is the biggest risk for investments. One part of the world is reeling under weak oil and commodity prices while major economies like Eurozone and Japan are hardly keeping their heads up due to structural issues. Greek election results could cause a major upheaval in the Eurozone if the country goes out of the Euro. Russia could be politically unstable if the economy falls off the cliff. Political instability in many parts of the world will affect global economic growth.
On the market front, risk aversion could increase leading to sell off in emerging assets and currencies. Risk aversion would stem from issues of Euro weakness, China hard landing, free fall in the Russian economy and global deflation. Read our Currency Market Analysis for 2015 for understanding global risk aversion.
On the domestic front, the government could see revenue shortfall if economy is sluggish on the back of weak domestic and global demand. Corporates could see revenue growth slowing down on lack of rising demand in the economy. Indian equities could see rerating downwards if corporate growth is weak.
USD has strengthened in 2014 as the USD Index gained 13% in a 1 year time period. India benefits from a strong USD as it helps exports from IT and Pharma. However imports become expensive especially oil imports but given that oil prices are down sharply, a weaker INR will not really impact the country too badly. However it is imperative for policy makers to bring down fiscal and current account deficits and lower inflation expectations to keep the INR relatively stable against the USD.
On the commodity front Gold, silver and crude oil prices have fallen by 14%, 27% and 50% from their year 2014 highs level. The reason is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products from most of the major economies. India will benefit from lower oil prices as oil forms around 38% of its subsidy bill. Inflation expectations come off as lower oil prices lead to lower deficits, lower inflation and lower interest rates.
There seem to be a lot of factors in the current scenario that can lead to re-rating of equity markets across the World. Sensex and Nifty would still remain strong due to strengthening fundamentals of the Indian economy. Improvement in the economic fundamentals can channel the next level of growth for the corporate earnings. Rise in corporate earnings would re-rate the indices to higher levels from the current one. Market expectations are that Sensex and Nifty will continue to scale new highs but will see volatility in 2015 due to global concerns.