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Will 2015 be as exceptional as 2014?

2014 was that rarity--a year that was predictably good for investors. Will 2015 follow the pattern?

What an amazing year 2014 has been. For once, investors' lives ran the way they had been predicted to at the begin of the year. The stock markets did extremely well so equity mutual fund investors made lots of money, Rajan's RBI stood firm on interest rates, but with rising expectations of an impending fall in rates, bond fund investors did pretty well too.

For investors, the good times are here with a vengeance. The year began with a cautious optimism that in May, India would finally have a government that would move forward on economic reforms. At the time, the general view was that the NDA's best case would be to 230 seats in the Lok Sabha and with these many seats under its belt it would be able to bargain its way into gaining some additional allies so that a government could be cobbled together. And in fact this remained the consensus view of mainstream political commentators till the election results came out. In fact, as late as the May 16th, when the counting started, more than one new channel were talking about a three-way race for the post of prime minister.

However, the markets knew better. If you look at the way stocks were doing during from February onwards, the markets seemed to know with increasing confidence which way the elections would turn out. But then, markets have a way of doing that. The market as a whole seems to know something neither the news mongers nor even the individual market participants know. Somehow, the whole knows much more than any part does. Or maybe I'm reading too much into this. Perhaps equity investors are just inveterate optimists, and when the optimism turns out to be correct then we read a little too much into it.

Anyhow, through the year, with a couple of pauses--mostly passing nods to foreign problems--equities have gained relentlessly. The Sensex and the Nifty are up about 30 per cent this year. Practically all types of equity funds have done better--often much better. The average large-cap fund has gained 34 per cent, with a number of funds gaining around 40-45 per cent. Funds that focus on a mix of large-cap and mid-caps have gained an average of 45 per cent while mid- and small cap funds have turned in average returns of 72 per cent this year.

After a long time, bond funds too have done well. Long and medium term gilt funds--which are the most sensitive to the faintest whiff of falling interest rates, generated returns of 16 per cent over 2014. A number of bond funds had returns of 20 per cent. It's interesting to note that unlike most past episodes of sustained high returns in such funds, the current one has happened without any actual drop in rates. It's just the falling inflation and the steadfastness of the RBI's attitude that has done the job.

Of course, international oil prices are the icing on India's cake. If one wants to, one can speculate what would have happened to stocks, bonds and the government's finances. However, fortune favours the brave. If the other variables had not been in place, then low prices wouldn't have brought much comfort.

But now comes the question of 2015. Can investors hope for the good times to continue? The answer is simple. As far as 2015 itself goes, it's not possible to make a prediction with anything like it was for 2014. A lot of things have gotten going, but for most businesses, they won't show any positive results for a year or two. We've had a nice optimistic forward-looking high, and reality will no doubt catch up but it will take time. So from a longer-term perspective, yes this is great time to invest. However, where the Sensex will end up on January 1, 2016, one can just make a guess. Perhaps the guess will be easier to make after Mr Jaitley presents his budget.