Expert Zone

Straight from the Specialists

As liquidity dries, time for fundamentals

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

The focus is back where it should be for equity investors – fundamentals.

In the past few years,  markets around the world have swayed to the wave of liquidity unleashed by central banks in a bid to get their economies back on track. The U.S. Federal Reserve, for one, was buying as much as $85 billion of bonds a month since September 2012. But that tap is beginning to taper with the Fed reducing purchases by $10 billion in January and another $10 billion in February.

We feel that this, together with a host of factors at home, sets the stage for a more sanguine approach to equities. I indicated in my note last month that we expect 2014 to be a year of fragile recovery for the Indian economy. The scenario will be similar for Indian equities.

There will be some improvement in GDP growth from around 4.8 percent this fiscal to 6 percent in the next, driven by implementation of stalled projects, debottlenecking of the mining sector, and higher external demand.

At the same time, the upside remains limited because the project pipeline has narrowed significantly. Further, the Reserve Bank of India’s stated stance of moderating inflation means interest rates will remain high in the foreseeable future. Banking credit growth has been sluggish this year and will continue to be so in the next fiscal.

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