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Business News/ Money / Calculators/  Takeaways from the 2014 stock market rally
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Takeaways from the 2014 stock market rally

2014 once again proved that one should not stay away from markets, waiting for a better opportunity

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The Indian equity market has gained about 30% since January, and 2014 has been the best year for stocks since 2009. Also, after over six years of underperformance, the Indian market, has convincingly passed the highs seen during the previous bull run.

The environment turned in favour of equity markets in 2014 and, arguably, marked the beginning of a new bull run. Not only was a new government, which is widely seen as decisive and market friendly, voted into office, but some of the macroeconomic indicators also started to turn favourable.

The economy is expected to pick up pace, inflation has softened and the current account deficit, which was a major source of worry in 2013, is now manageable and under control. All these factors have worked in favour of the stock market. Since the narrative changed dramatically for the Indian equity markets in 2014, here are some of the takeaways from the rally.

Driven by sentiment

2014 once again confirmed that markets are driven by sentiments and expectations. It’s expectation that leads to higher prices much before reality can take shape.

It was expected that the government will change in 2014 after the general election, but markets began to inch up much before the actual votes were counted. For example, between 2 February and 16 May, the Sensex went up by over 16%. As the election result turned out to be better than expected, markets continued the upward movement on the expectation that the new government will take faster decisions, which will improve the overall business environment.

“This rally is a hope rally," said Daljeet Kohli, head of research, IndiaNivesh Securities Pvt. Ltd, adding that there are two sets of investors in the market. The first is extremely bullish and believes that everything that the government is saying will happen. The second is of sceptics, but these investors are not sure whether things will indeed not move forward. And this is pushing up stock prices.

Speedy change

Another takeaway is that when the situation begins to turn, the market reaction is fast, which means that there is a chance of investors waiting for the right time to invest being left out.

“The biggest takeaway this year is that if investors believe in the economy, they should invest when the markets are low," said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt. Ltd. There are many investors who missed out of participating in the 2014 rally and are now lamenting that they should have invested in the second half of 2013, he added.

Therefore, it is important to be in the market. In fact, in 2014, events unfolded one after another and did not offer any chance to investors waiting on the sidelines to enter at a comparatively lower level.

While the market was still on a high after the government was formed at the Centre, global commodity prices, including crude oil prices, started falling.

Being a net importer, falling commodity prices works in India’s favour. Among other things, it will help contain fiscal and current account deficit, which is positive for the market. Falling commodity prices has also opened up the possibility of an interest rate cut, which is pushing up stock prices in rate sensitive sectors.

FIIs: biggest contributor

Although it is argued that India is predominantly a domestic story, the money driving our markets is foreign. While domestic investors have started coming in, the dominance of foreign money only increased in 2014. Foreign investors have pumped in over $16.55 billion (about 99,922 crore) in the current year, compared with net selling of over 36,463 crore by domestic institutional investors.

Lack of participation by domestic investors and the dominance of foreign money could be a risk for the market. “This is always a risk because money will flow to markets where the return is higher," said Kohli.

Bandyopadhyay noted that globally, while some central banks will continue their easing programmes, liquidity conditions in 2015 may not remain as comfortable as they were in 2014. However, experts agree that India will remain an attractive investment destination in the growth scarce world.

Government action

If this is a “hope rally" and markets first went up in anticipation and then as a consequence of the election outcome, its future now depends on government action.

The stock market is expecting the government to push economic reforms, which will improve business climate. “Government action will be important. I don’t expect big bang reforms, but the government will do what is politically acceptable," said V.K. Vijaykumar, investment strategist, Geojit BNP Paribas Financial Services Ltd.

There is consensus among experts on the issue. “This is the most important factor," said Dipen Shah, head, private client group research, Kotak Securities Ltd, adding that steps taken by the government will also have a bearing on Reserve Bank of India’s actions. The central bank will be more comfortable in cutting rates if the deficit is brought under control.

“Markets have been banking on reforms and if that does not happen, there will be frustration," said Bandyopadhyay.

Mint Money take

In 2014, the stock market turned around after years of underperformance, and so far, has largely been driven by expectation of improvement in the economy. As is often argued, 2014 once again proved that one should not stay away from the market, waiting for a better opportunity. Many investors were left out this time as well. Therefore, it is important to keep investing at regular intervals. For now, the rally will look for strength in policy action.

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Published: 14 Dec 2014, 11:54 PM IST
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