Thematic Insights

02 Jan 2015

Outlook - 2015
Wish You All Very Happy & Prosperous New Year - 2015.
"Prediction is very difficult, especially if it's about the future."
--Nils Bohr, Nobel laureate in Physics
Writing an outlook for upcoming year 2015, specifically when it has already moved up by 30% in
just one calendar year, is surely a challenging task. Predicting markets behavior is fraught with
even higher risk as the larger part of rally in the past year has been on the basis of
hopes/expectations. Its said that those who have knowledge, do not predict and those who
predict, seldom have knowledge. Still, here we have tried our best to predict the course of market
over next year.
17.3 Bln, in Indian equities. Additionally, FIIs
put in USD26.6 Bn in Indian Debt market
during CY2014, providing support to Indian
rupee. This also shows conviction of foreign
investors in India story.

Where do we stand?
India is historically considered by many to be a highgrowth economy full of long-term opportunity. The
countrys thriving democracy and more than 1.25
billion consumers, reportedly shall have around 60% of
the country's population in the working age group, by
2020. This can reap a rich demographic dividend. India
seems to be turning the cornerpolitically,
economically, socially and perceptually.
Generally speaking, Equities give best of returns, when
economy is growing with lower inflation. Current time
is good time from that perspective it will enter
sustainable period of high growth with low inflation.
Real GDP is likely to inch up in FY16 to around 6.4%
from 5.3% 5.5% in FY15, to be led by a recovery in
investment cycle and steady roll-out of reforms by
Government. Inflation outlook is benign due to
decelerating rural wages, muted increase in MSPs of
agri-products and lower global commodity prices.
Indias party is just getting started.

Globally there was a sharp decline in crude oil

prices. Brent crude dropped from USD 115
levels in June 2014 to levels below $60 per
barrel, due to lower demand and mainly due
to excess supply. Further, the decision by
OPEC nations to not cut oil production means
that crude oil prices will remain under
pressure for the next couple of quarters.
Decline in the price of crude oil has been a
big positive for the country.

In addition to global issues (Russian Rubble

volatility,
European
uncertainties
over
economic recovery), Indian currency has
remained fairly steady, in this era of dollar
strengthening. Dollar index has moved up
from 80 levels in June 2014 to 90 levels by
end of calendar year 2014 - more than 12%
appreciation. Whereas, INR has depreciated
less than 7% - from 59.20 per dollar to 63.20,
during same period.

Besides, the important factors that may affect

the stock markets in 2015 would be global
and domestic market environment, inflation,

Key Investment rationales

Indian equities have seen a strong liquidity

driven rally in the year 2014. During the year
2014, BSE Sensex jumped 29% and CNX Nifty
jumped 31%. FIIs inflows were very strong
and they have pumped approx. USD 16.2Bln
peak during the calendar year was USD

Capital Advisors
(your life-time investment advisor)
1102, Level 11, B Wing,
Peninsula Business Park,
S B Road, Lower Parel,
Mumbai 400 013. India
Tel: +91 22 23683782
Email : jshah@capitaladvisors.co.in
Web : www.capitaladvisors.co.in

and slow-down in China may keep commodity

prices lower for some more time.
Simultaneously with US Federal Reserve
aiming to raise interest rates in mid of
calendar year, dollar may continue to remain
strong. Accordingly, part of gain to user
industries from fall in global commodity prices
have been off-set by dollar strength (rupee
depreciaon). This trend may continue for
some time, and the same may benefit sectors
like Aviation, Logistics, Lubricants, Cement,
Ceramics, Paints, Plastic, Textiles, etc.

interest rate scenario, fiscal / trade scenario

and reform actions from the Modi
government which is taking strong steps for
revival of the economy. An environment of
positive growth, declining inflation and
possible rate cut by RBI in early 2015 are
likely to be main catalysts for Indian equities.

On divestment front, we expect more

announcements on the first quarter of
CY2015. During that period, some volatility
can be observed in the markets due to oversupply of paper. However, we believe that the
equity markets momentum is likely to
continue during next year also and it would
be largely backed by earnings growth.

3.

Reforms & infrastructure spending - The

current political tug of war at Upper House
and Lower House of Parliament has not
stopped the ruling government in taking
forward the long awaited reforms, which
delivers on economic growth agenda. The
adoption of Ordinance route to endorse
legislative reforms is a sheer display of
governments willingness to move on with
reforms as the only course to lift Indias
economic prospects. The government has
promulgated Insurance Amendment Bill, Coal
Mines Amendment Bill, Amendment to Land
Acquisition Act thus making room for
improved capital flows, removing uncertainty
on coal mines allocation process and
eliminating the major hurdles on land
acquisition for infrastructural development.
The GST Amendment Bill was earlier
approved by the Cabinet and is set to be
introduced in the Budget session of
Parliament. Every announcement from Central
Government bids the process of reform closer
to Make in India a reality. All these
measures should benefit capital goods and
infrastructure sectors.

4.

Rate cycles to turn south - We believe interest

rates have already peaked out in the system
and the signs of lower interest rates are
evident. Though RBI has not yet formally
acted on benchmark policy rates, but money /
bond market rates are already experiencing
downward trend wherein CP, CD and NCD
rates have come down by almost 20-60 bps
over last few months. The inflationary
expectations are also benign going ahead due
to sharp fall in crude oil prices. RBI has also
indicated to cut rates in 2015 as risks to
inflation remain balanced. This trend should
benefit rate sensitive sectors like NBFCs,
BFIs, HFCs and Automobiles and also debt
laden companies.

By and large, the street has been expecting

the growth rate of 15-19% CAFR in next
three years.

(source MOSL Strategy Report Nov14)

Despite all these positives, it is said that change is only

constant and uncertainty is the only certainty. Risks to
our view may emerge from poor FII inflows following
US Feds decision about its interest rate increase.
Other risks could be Europe slowing down further,
global deflation, China hard-landing.
Themes
Following themes which have been playing out in last
few quarters and may play out well in 2015
1.

Demographic dividend Structurally strong

domestic demand led by young population,
rapidly growing middle class which itself is
sizeable-one, rising aspirations backed by
wider technological and telecom accessibility
and rapid pace of urbanization have changed
consumption behavior. This is leading
population gradually to premium products in
respective categories. Sectors like FMCG,
Consumer Durables, Auto, Construction
materials, Media, Life-style, etc. using this
theme could benefit.

2.

Commodity meltdown and dollar strength

With discovery of Shale Oil & Gas reserves

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To conclude, the relative attractiveness of the Indian

market is intact with all the ingredients to catapult it
into the next phase of growth and development. While
it will take some time to unlock the demand drivers,
valuations have factored in this improvement in
advance which puts near term pressure on equity
markets as an asset class.
Net to net, we have already started our golden journey
to prosperity and same may continue in CY2015, albeit
with few hic-ups.
All are invited in this journey.
Happy investing !

Capital Advisors Team

mail@capitaladvisors.co.in
02jan15

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