US equities extend bullish support to global bourses:
US equity market is leading from the front since mid-October 2014 optimism on US economy and resultant FED comfort on growth & employment with end of QE and guidance on rate-hike, which is believed to begin by mid 2015. Since then, DJIA index is up from 15850 to 18100, up by over 14% in less than 3 months. Given the sharp spike in USD driving DXY up from 84.50 to 92.50 since mid-October 2014 (up by 9.5%), USD returns for non-US investors from Euro zone, UK and Japan is very attractive. Despite high valuation-build since mid October 2014, there is significant upside gains to pull-in investor appetite, as US economy continue to outperform developed economies over long term. The contradictory stance in interest rate direction retain the currency advantage for the US against its peers. All combined, global investor appetite for US equities will stay strong with higher allocation for 2015. It is matter of time for DJIA index taking out Boxing Day high of 18103 to much higher levels with target at 20000 at conservative 10% appreciation by or before end of 2015. The strategy will be to accumulate on corrective dips with strong long-term base at 17000-17250. It will be an unpleasant surprise if DJIA tanks below 17000 as no major risk factors are in the radar.
India equities in bullish sideways mode:
India equities is mirror image of the US but at lower bullish pace; since mid-October 2014, NIFTY is up from 7723 to 8626 (by 11.7%) against currency depreciation from 61 to 64 during this time (by 4.9%), thus delivering USD return of around 7% against the comparative return of 14% for DJIA for US investors and 23% exchange rate adjusted returns for non-US investors in US equities. This would mean that FII investors will shift focus from India to US in 2015. Having said this, it is not end of flow for India. The economic story ahead is strong thanks to external tailwinds and resultant beneficial impact on macroeconomic fundamentals, supported by pick-up in growth momentum. It is also true for non-US investors (into India) that Rupee is in appreciation mode against major (and EM) currencies despite marginal depreciation against USD, thus retaining higher allocation for India among emerging markets. Combination of significant upside in macroeconomic fundamentals supported by favourable monetary conditions, it would be an unpleasant surprise if India is not given an upgrade in sovereign rating, thus bringing in new investors and higher India allocation from existing investors; reduced dependence on hot-money FII flows being replaced by FDI flows against lower CAD at 0-2% will provide long term confidence on Rupee exchange rate. All taken, there is no risk of FII exit from India assets; flip side being the increased appetite from domestic retail and institutional investors.
NIFTY has set up long term base at 7723-7961 with high probability of punching new all-time high above 8626 post-Budget 2015, with near/short term pre-budget 2015 support at 8065 which should hold for revisit to 8445-8626. If the execution risk is diluted going forward, NIFTY will deliver 15-20% return with end of 2015 target at 9500-10000. The strategy is to be in buy corrective dips mode to ride the external tailwinds and domestic economic vibrancy. Given the significant upside in equity stocks relative to Fixed Income bonds, investor appetite for equity (over debt products) will provide the desired momentum.
Moses Harding
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