Hope and fear for markets in 2013

The year 2013 could well turn out to be a year of hope as conditions are seen favourable for equities, bonds and the rupee.

The markets will position for hope but with a bit a fear thrown in as well. This is likely to make the market more prudent than the speculative bubble of 2006-07, when the market threw out fear from its dictionary. In short, risk levels are much lower now in markets than what it was in earlier years and that by itself is positive.

Will the Sensex and Nifty trend up from current levels of 19,400 ?. AFP

The year 2012 has ended and the year 2013 is beginning. What does the year 2013 hold for markets? Will the Sensex and Nifty trend up from current levels of 19,400 and 5,870, respectively, which are close to calendar 2012 highs and the highest levels seen since April 2011.

Will the rupee strengthen from levels of 54.90 against the dollar, which is off record lows of 57 hit in mid 2012? Will 10-year bond yields trend down from current levels of 8.10 percent, which is 10bps off from lows seen in mid 2012? Will gold prices fall further from levels of $1662 per ounce, which is down from highs of $1790 seen in October 2012?

The markets will hope for the uptrend in equities, bond prices and the rupee and will hope for fall in gold prices. However, there is also fear in the market as uncertainties persist on the back of political issues, inflation, US fiscal cliff and euro zone debt crisis. The markets will go into 2013 with hope and fear.

Hope: The Sensex and Nifty are closing 2012 at close to calendar year highs. FIIs have been driving the indices higher with investments of around $20 billion in equities in 2012. Markets will hope that FII flows continue in 2013 and that hope has good foundations with central banks of the US, Eurozone and Japan following ultra loose monetary policy and flooding the system with cheap liquidity.

The US Federal Reserve is buying $85 billion of assets every month and is keeping interest rates at close to zero percent. The European Central Bank (ECB) is ready to buy bonds of euro zone nations in unlimited amounts if there are issues of financial market instability. Bank of Japan (BOJ) has increased its assets purchase target for 2012-13 by $119 billion after the recent elections held in December 2012. New Japanese Prime Minister Shinzo Abe is seen as favouring loose fiscal and monetary policies to bring Japan out of recession.

The rupee is yet to reflect the optimism of FIIs on equity markets. The markets will hope that the rupee will trend higher in 2013 on the back of strong portfolio flows.

Bond yields have trended down by around 25 bps in calendar 2012 and markets will hope that yields will fall further in 2013 on the back of the RBI's easing monetary policy and on the back of the government containing its fiscal deficit. The RBI has signalled that it will start reducing repo rates starting 2013 while the government is indicating that fiscal consolidation is a key priority and is ready to increase prices of diesel and kerosene to cut subsidies.

Gold prices are higher in 2012 but at $1,662 per ounce, well below the highs of $1,900 seen in 2011. Gold is seen as a flight to safety instrument and markets will hope that gold prices will stay down in 2013, as it is a signal for money to move into risk assets.

Fear: The markets have many factors to fear in 2013. One factor is mid-term polls given the issues facing the current government including issues of corruption, law and order and infighting among allies. Inflation has been the bugbear of the RBI with both wholesale price inflation and consumer price inflation refusing to trend down significantly from levels of 7.25 percent and 10 percent respectively. Fear of inflation could come true on hikes of prices of administered goods such as fuel and fertilisers. Fear of FII outflows is always there and if debt problems in the euro zone deteriorate or if the US cannot contain the fiscal cliff, the fear of FII outflows can turn out to be true.

The author is the editor of www.investorsareidiots.com a web site for investors.