2014 has been a good year for equities, with the BSE Sensex rising over 30 per cent. Hopes of robust growth and further reforms are likely to propel markets in 2015, analysts say. But the key thing to watch will be global liquidity, which is the most significant driver for Indian stocks.
Foreign investors pumped in over $40 billion in 2014, driving domestic markets higher, but the quantum of flows in 2015 will be determined by a number of global factors.
HSBC has compiled 10 risks that could threaten the rally in equities in 2015.
1) A global recession could be a disaster at a time when there's not much policy ammunition left for central banks across the world because overall debt in the developed world remains high, fiscal positions have got worse and interest rates are at rock bottom, HSBC says.
2) Greece and Portugal (peripheries) have proved to be the Achilles heel in eurozone, but now stronger economies such as Germany (core) are pressure because of the slowdown in emerging markets and the crisis in Russia. The descent of the world's fourth largest economy into recession could lead to a selloff in eurozone equities and euro, the report says.
3) Growth in China - the world's second largest economy - has come down from double digits to 7 per cent; Its balance of payments surplus has narrowed from over 10 per cent of GDP to 2 per cent and its export growth has slowed from 20-30 per cent to 5-10 per cent, HSBC says. If China slows further, commodity prices will suffer and equity markets across China, Australian and Hong Kong would fall, adding to deflationary pressures worldwide, the investment bank notes.
4) Emerging market growth has been disappointing, inflation remains high in some countries, and external positions are rather uncomfortable, HSBC notes. But, stock markets in India, Indonesia, Mexico, Turkey and Brazil could benefit from deep-seated structural changes, the report says.
5) Rate hike in US could trigger crisis in some emerging markets - where balance of payments problems are sizeable - and, alongside QE in the Eurozone and Japan, could lead to a much stronger dollar, HSBC says. So, rather than the US pulling up the rest of the world, other economies would effectively drag the US back down, the report added.
6) The 18-country eurozone grew only 0.2 per cent in the September quarter; inflation remains weak at 0.3 per cent and unemployment high at 11.5 per cent. Expectation that the ECB will start buying government bonds in early 2015 has become a consensus trade, HSBC says. If QE drops off the ECB's policyagenda, European equities and euro will fall, the investment bank says.
7) Japan, the world's third largest economy has been struggling under deflation. To drive growth, the government may increase its borrowing to finance tax cuts or increase public spending, measures that may result in hyperinflation, the report says. This could result in a collapse in yen and currencies of Japan's competitors (e.g. Korea, Taiwan) could come under stress, HSBC added.
8) A strong dollar, resulting from a collapse in confidence in monetary regimes elsewhere, would impact Latin America where many economies are facing high inflation, recession and balance of payments positions, the investment bank says. It would also impact commodity prices, which are priced in dollars.
9) Oil prices could begin to rise if supplies shrink or consumption picks up. A spike in oil prices would benefit commodity exporters (Nigeria, Venezuela, Russia, Saudi Arabia), while heavy importers of oil such as India will suffer, HSBC says.
10) Liquidity black holes, like the one witnessed in October 2014, result from sudden drop in market liquidity, which drives volatility, the report says. As central banks start to normalise policy and remove support, there is a risk of rising spikes in the liquidity premium across asset classes, HSBC added.
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