Global Equity market : What next in 2015?

Dream-run in 2014 despite economic gloom & doom!

2014 is great relief for global equity market to compensate for the lean patch of 2010-2013; it is also not surprise to see significant gains in Emerging markets on shift of appetite from developed economies to select high growth emerging economies, with India getting preferred advantage. While DJIA index is up by over 70% in 5 year 2010-2014 period (from 10430 to 18000), gain in 2014 is low at 8.6% (from 16572 to 18000) with intra-2014 rally of 17% from February low of 15340. The intra-2014 fall and swift recovery was from rate-hike jitters from FED with start of QE unwind, countered by ultra-dovish monetary policy stance by UK/Euro zone, Japan and China which pushed FED to stay in wait-and-watch mode and be patient on rate-hike.  The excess liquidity at Zero (Negative) Interest Rate was boon to emerging markets on higher allocation of FII investments into EMs. It is evident from sharp gains in NIFTY in 2014 by 30% (against intra-2014 rally by 38% from February low of 5933) as against 5 year 2010-2014 gains of 57%. It is more significant in Bank NIFTY posting gain of 62% in 2014 (intra-2014 at 86%) against 5 year 2010-2014 gain of 105%. India equity bullish momentum was from combination of external and domestic factors; luck from external forces of ample liquidity and sharp reversal in prices of imported commodity assets and hope (and optimism) from Narendra Modi. All combined, there was overnight change in sentiment (and expectation) from rating downgrade threat to upgrade optimism (and euophoria). The kind of external liquidity driven equity valuation in 2014 does not give permanent relief unless backed by macroeconomic fundamentals, as improved outlook in developed economies can trigger FII reverse flow!

2015 is consolidation phase driven by development in macroeconomic fundamentals:

Will the 2014 euophoria stay valid for India equity market? It depends on sustainability of luck factor (from external cues) and transformation of hope (from domestic cues) into ground reality. It is safe to assume that the Tsunami kind of external tailwind support may not be there; an "as-is-where-is" position is the best to look for! The external risks are from churn in FII investment allocation from emerging to developed markets, FED rate-hike shift in 2015, value normalisation in commodity assets unwinding part of 2014 extended weakness and USD strength against EM currencies. It is also safe to assume that geo-political risks stay diluted when trouble shooters are in deep economic and financial turmoil. On the domestic front, the Government is indeed serious (and committed) to script the economic turnaround and efforts are visible despite limited political support. The worry is that India equity valuation has already been re-rated in 2014 absorbing most of domestic euophoria. The expectation has to now get reflected in macroeconomic fundamentals. While inflation worries are seen to be irrelevant and with optimism on growth momentum, serious concerns remain valid on twin-deficits which would add to structural pressure on growth-inflation dynamics. So, lot to be done by the Government to arrest dilution in hope (and optimism), absence of which will reverse the euophoria driven 2014 re-rating!

What is the trading range in 2015?

Combination of all cues in play (domestic and external), it does not take us anywhere (to set up directional bias on way forward) to fix focus on a parricular trading range with clarity and high confidence level. But, what certain is that there has to pleasant surprises or unpleasant shocks to trigger break-out of 7700/7750-8600/8650 current strategic focus range; at this stage believe that mid-October 2014 low of 7723 and post-2nd December 2014 high of 8626 will stay safe in Q1/2015. Beyond there, it is better to stay neutral and be ready (with fleet-foot) for break-out either-way! Same applies for Bank NIFTY between mid-October low of 15130 and post-policy high of 18923. Having said this, Bank NIFTY is expected to outperform NIFTY taking positive cues from rate-cut, improved credit risk appetite and pipe-line financial sector reforms.

On the external front, DJIA is expected to outperform NIFTY on exchange rate adjusted basis for new high over 18100 with strong support at 15855-17350.

Over all, need to keep attention on FII appetite (and mood-swings), FED rate guidance and domestic macroecomic data trend, not ignoring USD impact on Rupee exchange rate and commodity price impact on the CAD and inflation. All these factors will decide sovereign rating upgrade in 2015 or otherwise!

Wish you all a very profitable 2015! Keep in mind that not losing money is better than making money; it is good to be in credit balance but relief to avoid debit balance in the account!

Cheers!

Moses Harding