The year 2012 ended on an optimistic note for Indian Stock Markets with Nifty up around 27% in rupee terms and up 24% in dollar terms and people on the street are gungho about the Indian stock markets in 2013 and expecting another 15% to 20% return this year. However if you see the markets in the context of what happened in 2011 you might want to temper your euphoria a bit.
In 2011 Nifty was down 43% in dollar terms and 24% in rupee terms. So 2012 was a kind of upward correction and markets recovered around 50% of what it lost in 2011. With rupee being expected to stay under pressure due to high fiscal and current account deficit, FIIs, who are the major players in our market, are not likely to gain much on currency. Also the developments in United States such as debt ceiling which needs to be resolved after years of monetary easing could also be a dampening factor as far as external liquidity is concerned.
Back in India monetary easing beyond 200 bps in 2013 seems unlikely considering the negative real rate of return on fixed deposits due to more than 9 percent of consumer inflation. Also the year being the last year of the present govt, the budgets could be somewhat populist and investors might want to stay light due to elections.
Beside fundamentals one more thing that raises my eyebrows is the positiveness built in the environment. Each and every analyst on the market seems bullish and expects market to make new high. This is where I think a little bit of bad news could break the knees of the market as people will rush to protect their profits they made in 2012.
So conclusively I am not that bearish but also not very bullish on the markets in general in 2013. However selectively individual stories would play out and would deliver good returns provided you do not chase rally and buy into them whenever correction happens.
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