1. If economy does well i.e the country grows at a faster rate than average GDP growth of the country in past three years, markets usually perform better. But its a well known fact now that India will find it very difficult to grow above 8% if high levels of inflation & Interest rate persist. Hence the macro economic support would not help the markets in next 6 months.
2. If Companies do well and the EPS continue to grow at a rate more than the average PE ratio of the markets, the markets usually end higher over the previous year level. But in a recent article India Inc performance in FY - 2011, it was observed that though India Inc grew its revenue by 29%, its profits grew by just 9%. What was most interesting was the fact that interest cost of the India Inc grew more than 30%.
So it can easily be understood that India Inc will hardly show a profit growth of more than 8% in FY-12 due to prevailing high interest rates and costs in the system. The PE ratio of the market based on FY-12 earning is above of 14 times. So even the earnings growth would not support the market on the upside.
3. If global economies do well and there is abundant liquidity every where the markets might sometime ignore fundamentals and continue to rise. But tighter monetary policies in India & China is absorbing liquidity in fixed instruments. Also high inflation is the global problem now a days. Hence sooner or later developed world would also start raising rates which will suck liquidity from the system.
So the conclusion is that the markets are expected to slowly edge lower towards 5000 NIFTY levels in next couple of months and might end the year somewhere in the range of 5000 - 5600 levels. But individual stories will continue to playout. Hence investors should stick to large cap stocks with clear earnings visibility as midcaps doesn't perform in a dull market. Midcaps usually perform when large caps become expensive and people start hunting values in Tier 2 and Tier 3 stocks.