Market outlook: Keep expectations in check in 2015

For much of 2015, the stock market has behaved like a sentiment machine - at times, driven by optimism and, at other times, reacting to global headwinds. That is the beauty of the market and investors should learn to take this in their stride. In the short run, we have seen uptick in the market, helped by a rate cut from the Reserve Bank of India (RBI). On the flip side, headwinds from Europe and the US along with richer domestic valuations should keep optimism in check.

We expect 2015 to be volatile with reasonable uptick and some instances of downdraft based on local and global news. After two good years in 2013 and 2014, it would be preferable for investors to moderate their expectations. It is, of course, impossible to predict the market, so investors should not be swayed by past returns. From a valuation perspective, any consolidation is healthy for the markets and keeps expectations in check.

One of the top expectations for this year is a rate hike in the US, and currency headwinds globally. It may be difficult for the US to have higher interest rates while the rest of the developed world is conducting some form of quantitative easing. Europe is on a bond-buying spree, and so is Japan. This scenario is tantamount to tightening in the US.

However, if the US does raise interest rates due to a strong economy, it will definitely impact global markets. Equity markets are pricing a low- or zero-interest rate environment. A rate hike in the US will mean equity assets get re-priced, which will offer opportunities across equity assets.

In India, economic expansion is slowly taking root. The current account deficit is under control, wholesale inflation is negative, and the rate cut cycle has begun. Towards the end of the year, substantial rate cuts may be needed for economic expansion. There is a huge scope for the long-term investor as the economy expands. Lower oil prices also bode well for the government.

In the Budget, the government has done well to reiterate the fiscal consolidation roadmap, provide visibility on the capex cycle and focus on infrastructure. The government's finances are looking much better. Taxes have been raised. Oil subsidies are headed lower. Higher revenue and lower expenditure is a good combination for the government.

In such an environment, the highly leveraged segment is likely to do well. A 50 basis-point rate cut, once passed through to the broader economy, will reduce the interest burden of leveraged companies. Many debt-laden companies did badly relative to the rest of the market, and some of them are well-poised to make the most of lower rates.

Debt-ridden companies may not necessarily have the best financials, so it requires intensive research to narrow down to specific companies. Financials is another area that looks promising. Public sector banks require capital and lower interest rates should benefit banks as it will improve growth and reduce bad loans. A combination of lower interest rates, lower bad debts, and capital infusion is positive for the financial sector. Also, visibility on capex revival through increased government spending and addressing issues of financing infrastructure projects could benefit certain infrastructure sectors.

With the current price of crude and good growth prospects, India is the most attractive emerging market in the world. Equities, albeit not cheap, remain a good long-term investment option. The outlook for equity markets is very positive for next three to five years. Even debt markets offer good opportunities, with interest rates headed lower.

The author is Chief Investment Officer, ICICI Prudential AMC