NIFTY outlook for FY13

EQUITY MARKET OUTLOOK FOR FY13

Global liquidity and RBI’s growth supportive monetary stance to lift NIFTY

NIFTY closed FY12 in red with loss of over 9% down from 5834 to 5295; but for the late December rally from 4531, the pain would have been much severe. The intra-financial year loss from April high of 5944 to 4531 is very high at 23.75%; such is the volatility driven by FII play post Euro zone crisis and weak domestic cues since July 2011. FY12 is the year to forget; hence the investment strategy of MARKET PULSE for 2011 (“cash is king”) was to stay away from equity market and to ride the hardening interest rate cycle through investment in ultra-short term fixed income assets and to lock into longer tenor in the second fortnight of March 2012 at the peak of interest rate cycle. The objective was to preserve capital while earning decent returns on the principal. What next for FY13?

The external cues are mixed but seem to be out of the woods in the short/medium term; Euro zone is stable with combination of QE/LTRO financial support and there is minimal risk of disintegration of the Euro zone. US economy is showing signs of improvement and authorities are ready with QE3 to arrest any kind of weakness that may emerge. The policy stance of western economies to maintain ample system liquidity at very low interest rates till 2013-2014 provides good comfort to investors in FY13 if not beyond. The FII driven rally since late December 2011 highlights the confidence of off-shore investors and their strong appetite for Indian assets. There is no risk of FII pull-out who are expected to stay invested through FY13 with no signs of nervousness despite taxation issues (triggered in the Budget) and absence of political bandwidth to roll-out next generation economic reforms. The emergence of BRICS as economic power centre will keep India appetite high among global investors. The upgrade in India rating will lead to accelerated flows with intent to stay for long; removing the fear of “hot money” status.

The domestic cues are very weak; Government failed miserably in FY12 unable to meet its budgetary targets on all parameters; the slippage was huge. The mix of economic and monetary woes  is creating conflict of interest between RBI and the Government. The ability to meet FY13 budgetary targets on growth and fiscal deficit will be critical. On the other hand, RBI has to address the structural liquidity issues. The deficit system liquidity has to shift into surplus mode to drive the policy rate from Repo rate to Reverse Repo rate. This stance will be viewed bullish even without getting into rate cut action. There is very little support from domestic investors at this stage. The fixed income returns are very attractive while most strategic investors have turned passive having lost capital and interest on their investments since 2008-2010 when NIFTY peaked around 6338-6357; current levels are still below water by more than 15%.

It is possible that NIFTY has already formed a strong base at 5125-5175 support zone and looks good for extended rally into 5950-6000. The chances of taking out the high seen at 6357 (Jan 2008) and 6338 (November 2010) are bright on combination of bullish cues both from domestic and external sectors. The risk factor to this expectation can only be from RBI if they choose to delay shift into accommodative monetary policy stance; elevated interest rate regime (with tight liquidity) for extended period of time is big risk to equity market. Given the over-heated Bond market with 10Y yield flying over 8.65% (into 9%), RBI cannot afford to delay any further. RBI’s rate action on 17^th April (followed by next round in mid June) and shift of operative policy rate from higher end to lower end of LAF corridor (before end of Q2) will be the trigger for sharp rally into the set objectives. The prudent investment strategy for FY13 is to have equal distribution between Equity and Fixed Income assets. May be, FY13 is the year for the bulls having lost the battle in FY12!

Moses Harding