Stock market outlook: Moderate your expectations from equity

S. Naren*, Chief Investment Officer at ICICI Prudential AMC, has turned defensive and so when the BSE Sensex touched its all-time high crossing 27,200 levels last week, I called him to understand what next for the Indian equity market. To my surprise, he told me fixed income is the most attractive asset class. That was surprising coming from an avid lover of equities.

His reasoning was apt as his intention was clear that investors need to moderate their expectation of returns from the market. He felt the returns from here on would be moderate and in such circumstances regarding safety at the current levels, fixed income has a lower risk and decent return.

The Sensex has surged continuously and now it's in a zone which has not been explored till date so it would be an assumption that the market should correct on regular intervals or at least consolidate after regular intervals to continue its upward journey. More than the Narendra Modi impact, the market is rising on liquidity. Sentiment is positive and it could make the market run ahead of fundamentals. Until interest rates remain low in developed economies, FII money will continue to find its way into markets like India.

On September 4, the European Central Bank (ECB) cut rates to record lows and announced plans to combat low inflation in the region. The US Federal Reserve too is unlikely to raise rates in the near term.

Till the momentum continues, the market would remain firm. Even if there is a correction it will not be sharp. But that should not make investors complacent. With equities under-owned and other asset classes like gold underperforming, there is a high possibility that investors may rush into equities. Getting carried away is easy in today's market but investors should enter the market with guarded optimism as the rate of growth in stocks has come down.

Liquidity can push the markets upwards but for it to sustain India Inc will require to deliver impressive performance quarter after quarter. Meanwhile, in the current week the market will keep a close eye on the Supreme Court's verdict on September 9 in the coal allocation case. On Friday, September 12, the government will unveil July industrial production data and August consumer price index (CPI).

(*An earlier version of this story had incorrectly spelt Mr Naren's name. It has now been corrected.)