What will drive the market in 2015

January 3, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters).

The stock market woke up from its long hibernation in 2014, with the Sensex rallying 30 percent during the year. If not for the market correction in the last two months, Indian bourses would have been the best performers in the world.

The recovery was solely due to the optimism generated by Prime Minister Narendra Modi, with FII investment in Indian equity crossing $16 billion.

Brokers trade on their computer terminals at a stock brokerage firm in Mumbai

But Modi confronted opposition in the Rajya Sabha, where the BJP-led coalition is in minority. Lack of support from opposition parties stopped bills from being passed. However, the government introduced ordinances (decrees) in respect of coal and insurance – the first to get industry going and the second to create an environment for reform and attract foreign investment. The government also made amendments to the Land Acquisition Act through an ordinance, which is yet to receive the president’s approval.

The market now believes that the prime minister means business. Finance Minister Arun Jaitley has also indicated that the next budget to be presented in February will adopt a tax system which is globally compatible, adds clarity to the tax liability and is in tune with internationally comparable tax levels. The budget has raised expectations and will be an important trigger for the market.

But there can be disruptions. The rate of interest, which is a prime consideration with the market, is outside the ambit of the government. It is the exclusive domain of the RBI and, with inflation targeting initiated by governor Raghuram Rajan, can take some time to be moderated.

India's Finance Minister Arun Jaitley speaks during news conference in SrinagarThere will also be external factors to contend with. First, world economic growth (except the U.S.) is likely to drop, making exports a little difficult. Second, there is no certainty about the international prices of crude oil. If prices rise again, energy importing countries like India will be hit both in terms of inflation and current account deficit. Third, the U.S. Federal Reserve is expected to increase interest rate which may reduce FII inflows into emerging market economies and check rising equity prices. Fourth, there is always a possibility that monsoon will disappoint.

Even so, if the budget measures up to the indications given by the finance minister, it will be a strong driver of the market. To sustain the bull market, the government will have to keep the wheels of the reform process running, which is likely under Modi.

Most policy parameters appear to be very positive and corporate growth and profitability should improve. With higher earnings per share and faster corporate growth, PEG (price/earnings to growth ratio) will be lower, creating enough space for share prices to rise further. The Sensex could possibly rise 20-25 percent in 2015.

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