2014 will be a year for stock markets

The US Senate may vote on debt ceiling by the week-end or next week, believes Giles Keating, head-research for private banking and wealth management at Credit Suisse, who expects things to get worse before they get better.
"If we get a resolution of US government problem then the markets will again focus on tapering and when the Fed is going to start draining the liquidity and of course that can be bad news for emerging markets (EMs)," he told CNBC-TV18 in an interview. Currently, Credit Suisse Global Investment is underweight equities mainly on the back of political uncertainty in Washington, the resultant pause in growth momentum and also the lingering tapering issue. "If all those worries get resolved, then we would move to a more positive stance and we will have done that by end of this year and as we go into 2014, we would hope to be overweight in stock markets on the back of a gentle acceleration in growth around the world and gradual rise in corporate earnings and we would balance that with a more cautious position on fixed income," Keating says. He says 2014 will be a year for stock markets with Europe beginning to come from behind and EMs having some brief period of catch-up but in a pretty selective way as investors really look conditions genuinely improving.
Below is an edited transcript of the interview on CNBC-TV18:
Q,debt ceiling debate could get resolved only after a gut trenching fall in asset prices?
A: We are watching the US government situation very closely. There are one-two good signs with two sides indicating possibility of a vote in the Senate end of this week and in the House next week. This is a high stake game and the two sides are far apart. The risk here is that these debates could go on for a long time. Certainly, past the deadline, which are mentioned taking as well into second half of October, this will lead to financial market disruption. We have already seen short-term interest rates rise sharply. Lot of people does not want to hold treasury bills. It will get worse before it gets .
Q,emerging market. Do you see this continuing until the end of the year into countries like India?
A: I do not think it can be relied up. If we get a resolution of US government problem then the markets will again focus on tapering and when the Fed is going to start draining the liquidity and of course that can be bad news for emerging markets (EMs). So I don’t think there is any kind of straight line for these flows coming back into Ems’ stock markets. There will be one or two good periods ahead but investors are getting more and more selective. They want to see emerging economies run sensibly with good policies and I fear they will be very unforgiving if they dont see those improvements.
Q: How do you chart US growth from hereon and according to you when and how will the tapering theme play out?
A: The US economy even before we got into this problem in Washington was showing a slight loss of momentum into three of the economic indicators. That is likely to continue up to the end of this year even if we get a resolution to the problems in Washington. Next year, we will see a reacceleration in US, not least because of cash on corporate balance sheets and interest rates are extremely low. Against that background, the Fed will go back to discussing tapering and whether that happens early next year or later next year, it is definitely on the way.
Q: Focusing back on India; there seems to be some sort of momentum that we have seen over there in the last few days. So, after the rough treatment that we got in July and August, do you see elements of a turnaround in the Indian economy or economic policy and equities?
A: I think investors, when they look from abroad into India are going to want to see clear signs that on he one hand monetary and macro policy are stable and the moves central bank has been making go in the right direction although more is needed. They want to see the current account deficit under control and importantly they want to see real progress on structural reform. Whether they are going to perceive all of that is a very big question mark. If they do not see those things then India perhaps can benefit in a limited way from those moments where investors are putting money generally into emerging market but it is likely to be a limited way as investors look to other countries where they see policies and outcomes going more clearly with a green light.
Q: What will be your three best asset classes from now to the remaining part of 2013, assuming the debt ceiling will be resolved and what will be your best assets in 2014?
A: In Credit Suisse Global Investment Committee, we are underweight equities. We are concerned about political uncertainty in Washington, pause in growth momentum in the US, we also concerned that the tapering issue is not gone away and is coming back. For all those reasons we are underweight equities. We have neutral position on fixed income although even there we would on balance be reducing some of the riskier parts of our fixed income exposure. So that is another cautious position for Q4. If all those worries get resolved, then we would move to a more positive stance and we will have done that by end of this year and as we go into 2014, we would hope to be overweight in stock markets on the back of a gentle acceleration in growth around the world and gradual rise in corporate earnings and we would balance that with a more cautious position on fixed income. So, 2014 will be a year for stock markets with Europe beginning to come from behind and EMs having some brief period of catch-up but in a pretty selective way as investors really look conditions genuinely improving.

BSE Sensex to touch 24,000 by end-2014

The BSE Sensex is forecast to scale new highs next year after elections, attracting offshore funds despite an expected rough period for emerging markets when the U.S. Federal Reserve shifts monetary policy, a Reuters poll showed.
The poll predicts a better performance than this year's 9 percent increase but far more modest than the 25 percent surge in 2012 when foreign investors bought a massive $24.4 billion worth of Indian stocks.
The consensus of 21 strategists and brokerages polled Dec 4-11 put the index at 22,625 by the middle of next year and an all-time high of 24,000 by year-end, a gain of just over 13 percent from Wednesday's close of 21,171.41.
Vivek Mahajan, head of research at Aditya Birla Money, says Indian shares will rise after the vote "on expectation of improvement in economic activity, better policy decision-making and an improvement in the investment climate."
Prime Minister Manmohan Singh's government has been weakened by years of fractious coalition rule and has struggled to push through reforms in the labour market, taxation system and financial markets owing to lack of political consensus.
The main opposition party is widely perceived as more business-friendly by investors and its victory in recent state elections pushed the Sensex to a record high of 21,483.74 on Monday.
This makes for more moving parts than usual in putting together a forecast.
"The market call in 2014 is more challenging for us than we can remember in a while. It requires us to anticipate what the Fed will do, second-guess election results and then forecast India's policy response," wrote analysts at Morgan Stanley.
"If all three go the market's way, we may be in a bull market. However, if two out of three go against the market, we could see significant downside to indices."
Morgan has the lowest forecast in the sample, calling the Sensex at 20,840 by the end of next year. 
Indeed, a loss of confidence in government policymaking, a yawning current account deficit and a sharp slowdown in growth hampered the market's performance this year.
The ride isn't likely to be smooth in 2014 either.
Starmine data shows seven of the 30 companies that make up the index will likely see earnings drop next fiscal year. Six of those are companies in the heavy machinery and power sectors which have traditionally been reliant on government policies, subsidies and tax exemptions.
TAPER TURBULENCE WELL KNOWN
The Fed's decision to not cut back on its $85 billion of monthly bond buying in September lit a fire under many stock markets around the globe, and helped the Sensex rally to a record high.
Global markets remain on edge over the tapering timeline. When the Fed does trim its massive stimulus program - predicted to begin in March in two separate Reuters polls this week - the Mumbai stock market could fall.
But as is usual in stock market polls, most analysts are bullish.
"In the short-term there could be a small correction but it will be good in the long-term. If the Fed tapers, it means the U.S. economy is growing well which is good for the global economy," said Subhash Gangadharan, senior research analyst at HDFC Securities.
Foreign institutional investors, generally the largest buyers of Indian shares, sold through most of the summer as the Fed first hinted at paring back its bond buying. They ramped up buying when the Fed delayed its plan in September.
Foreign investors bought Indian stocks and derivatives worth $1 billion on Monday alone, bringing their total for the year so far to over 1 trillion rupees, according to regulatory data.