Equity markets are likely to scale new highs in 2013 owing to benign global liquidity flows, reduction in risk-perception and change in the domestic economic outlook mainly owing to positive reform measures by the Government.

Overall in terms of earnings downgrades we believe that the worst is over and things will get better going ahead. Valuations are close to their long-term average but given the current scenario, there are still a lot of quality stocks for investors with a reasonable time horizon.

Opportunities

Given the improvement in outlook for global and domestic growth, Sensex EPS can end up at about 1,400 in FY2014.

So at 15PE valuation, we believe the benchmark index is likely to touch 21,000 in the next six-nine months and the broader markets are likely to do even better.

In our view, there are opportunities in both defensives and interest sensitives. In the defensive space we have a preference for growth at a reasonable value and in cyclicals we prefer those with a healthy margin of safety. Amongst defensives, the IT sector looks the best and to some extent pharma. Within IT, we prefer a top-down approach where we expect the large caps to do well.

We remain bullish on rate-sensitives. Amongst these, private sector banks in particular have strong capital adequacy, can further raise equity capital at high premiums leading to a virtuous cycle of dilution-infusion that is helping them gain market share from PSU banks, their branch expansion is also continuing at a healthy 15-20 per cent every year.

Moreover, they have also maintained better lending standards, which are now reflecting in their far better asset quality compared with PSU banks.

Quality stocks in the cap good space remain a decent bet, though one may need a longer investment horizon for this space.

We believe interest rates on retail loans are expected to be lower by about 100 basis points, so that is one positive catalyst on the near-term horizon, especially for four-wheeler companies.

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