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2015….Year Ahead

The New Year brings with it hope and optimism. After a blockbuster 2014, investors are eager to know what 2015 holds in store. Indeed, after an index gain of nearly 30% last year, the good times could well continue, at least in the near term.In the words of legendary value investor, Sir John Templeton: "Bull markets are born in pessimism, grow on scepticism, mature on optimism and end in euphoria". In other words, the best time to invest is when there is pessimism all around because that's when stocks are cheap.

The year 2014 witnessed lowest amount of money raised in a decade! However, the lackluster trends in the primary market can largely be attributed to the time taken in IPO formalities. As the reform expectations bring retail investors back to the markets, a new wave of confidence has taken over the companies that are ready to raise money this year. As such, 2015 will be a different story for IPO market it seems.

In an era where the developed world is still battling inflation and the central banks are only combating this through loose monetary policies, global investors are looking at opportunities outside of these countries. Naturally, emerging economies such as India and China among others are finding considerable favour.

Foreign institutional investors (FIIs) have been pouring money into the Indian stockmarkets on the back of the Modi wave. After 2 years of considerable slowdown under the reign of the largely ineffective UPA government, considerable hopes have been pinned on the Modi government to unleash reforms and kick start economic growth in the country.

Since Indian stock markets have always been influenced by foreign money, the surge of liquidity has led to considerable run up in stock prices. Therefore, will this rally last or are Indian markets ripe for correction? Further, how does the performance of the Indian indices compare with that of China?

Let us examine the second question first. As reported in the Economic Times, the past month has seen a huge jump in the Chinese stock markets. Indeed, Chinese markets have gained around 25% in the period, while Indian indices have gained a mere 1%. It has also been estimated that China's valuations are cheaper as compared to India based on one year forward earnings. In such a scenario, it is quite possible that FIIs may prefer to invest in Chinese equities as compared to Indian stock markets in the coming months. And the kind of money that has been pouring into India will see some sort of a pause.

Having said that, the notion of valuations in China being cheaper does not necessarily make it an attractive destination. Commodity prices crashing, wasteful investments and a possible debt bubble are all problems that make China a ticking time bomb.

The rise in stock prices has also been quite unprecedented in China. As reported on Bloomberg, the value of shares changing hands on China's two biggest exchanges exceeded 1 trillion Yuan (around US$ 162 bn) for the first time Last month. This is more than five times the average daily turnover during the past three years. In Shanghai, trading values have increased threefold when compared to the market's peak in 2007. Thus, the idea that China's valuations are cheaper based on forward earnings should be taken with a pinch of salt we believe.

India, in the meanwhile, has seen valuations become rich even though on the ground level economic activity is yet to significantly pick up. We are not saying this will not happen. The growth story very much remains intact. But the stock prices do seem to have run ahead of fundamentals somewhat. And we will not be surprised if some sort of a correction does take place.


These deal indications are only advisory in nature and may not be true in 100% cases. Read more....