Mkt to perform better in 2014, see 10-12% returns: BofA ML

A: It may be a better year than the last few years led by two-three things. We have seen the economy do badly and so, I do not think the economy is going to turn for this year but it will not get worse because we are growing at 4.5 percent on gross domestic product (GDP).

Some of the macro problems that we had last year, may ease off a bit specially the current account deficit has definitely eased off. The hope is that that maybe inflation starts to ease off a bit, at least we will not have rate increases, the issue is how fast we can ease this getting cut and third, we have elections, so we will have a better reform environment once the elections are out of the way because we will have a new government which will not have to worry about election for the next few years.

There is lot of hope in the market. One thing is certain; the economy will not turnaround in a hurry. It is going to be a very slow process; whatever government comes and whatever macro factors we have. So overall, it is a year where we are looking at 10-12 percent return in the market but not a big bang return.

The hope is that by the end of 2014, we would have build a base which makes us more optimistic that 2015 and 2016 will be good years for the economy, good years for earnings and good years for the market.

Q: What are the key risks for 2014 and what kind of downsides are you mapping from hereon? Where is the market supported and in case of some of these bad things panning out, what is the limit of the extent of downside that you can project for this year?

A: If you start with the globe, it is having a change in the way it will work. Last five years, we have been in an environment that had a very high liquidity and very low growth.

However, 2014 marks change where the liquidity is going to ease off, relative to what we have seen in the last five years. Hopefully, the growth will be better, there is change in environment and from India’s point of view, both these things will impact us, because lower liquidity means maybe flows won’t be as easy to come. You need to do that bit extra to attract money to India.

At the same time a better growth environment globally means at least our exports have a better chance of going faster which in-turn will provide a bit of a boost to the domestic economy. Second, the policy environment which is probably dependent a bit on the election; what sorts of election outcome you have. Upto the election time, generally there is lot of hope that we will have a great government, hopefully that follow-through comes and we start getting that environment improvement in terms of the reform outlook.

Third is inflation, which is partly linked to where the world is going but partly domestic food prices and if that can ease off then it may provide some room for Reserve Bank of India (RBI) to start cutting rates. But if that does not happen, because generally most people are building that in at the moment then rate need to go up rather than come down, which would provide the third risk.