Several major themes will influence investment returns in 2015. The clear positives for India are lower inflation and gradual growth recovery. Investors are also hoping that the Modi government will start implementing reforms in a more tangible way.

Most investors expect earnings growth to accelerate across Indian stocks in 2015-16. Valuations are on the high side. But valuations could rise much further on an anticipated acceleration in EPS growth, especially if the budget appears to encourage economic activity.

Most investors also expect EPS acceleration in the USA. Since the US is the world's largest economy, growth there should have a positive effect almost everywhere. But the rest of the world doesn't present a rosy picture. There is pessimism about most regions.

The Eurozone is struggling with a weak currency, low growth and with several large constituent economies, such as France, Italy and Spain, on the edge of recession. Deflation - prices falling to dangerously low levels - is quite a serious possibility in much of the EU. Plus, there could be a negative psychological impact on the entire region if Greece exits the euro, even though Greece is a small economy. Investors are also pessimistic about Japan, which has been dipping in and out of recession. Japan is also on the edge of a deflationary spiral.

Then there are the emerging markets (EMs). Every major EM, except India, is in a poor or average shape. China will do reasonably well, of course. But it has cut GDP estimates. Russia is in crisis, trying to cope with a currency crash, GDP contraction and raging inflation. Indonesia, another energy exporter like Russia, also has very high inflation and slower growth. Malaysia, also an energy exporter, has seen the value of exports fall by a third. Brazil and South Africa are both likely to register low growth as well.

The American growth story has already led to a strong dollar and the dollar could strengthen further as US interest rates rise. Hence, it would be reasonable for Indian investors to focus on exporters with an American focus, such as IT/ ITES and some pharma companies. At the same time, exporters with a focus on the Eurozone or other regions could see a slowdown.

The relative strength or weakness of the rupee will make a difference to exports. However, with all of Europe, Japan and China in slowdown, expecting exports to deliver an outstanding performance seems a little optimistic. The rupee has appreciated against all key currencies except the USD. This could make exports uncompetitive and expensive in a year when global demand will also be low.

The positive aspect of slow global growth is that it means lower energy demand. As a result, energy fuel prices - prices of crude, gas and coal - are likely to remain depressed through 2015. This gives the government time to straighten out subsidies and distortions across multiple sectors.

India is a very large importer of oil, gas and coal. It consumed about 189 million tonne of crude in 2013-14 (about 3.8 million barrels/day) and imported about 80 per cent of that at a cost of $165 billion. Between April 2014 and November 2014, the import bill was around $90 billion, although consumption was about the same. The full fiscal year bill is expected to come to about $115 billion. That's because crude prices have fallen by over 50 per cent in the last year due to weak demand and oversupply.

Similarly, India also imports about 30 per cent of its gas, and gas prices have dropped by about 25-40 per cent in different global regions. (US gas prices depicted in the chart have fallen the most due to the shale revolution.) Domestic Indian gas prices, which are linked to international prices and recast every six months, have also been revised at correspondingly lower rates than was expected.

Coal, the third major energy fuel, has also seen a fall of 20-30 per cent. India has steadily rising coal imports, which are up from 100 million tonne in 2013-14 to 190 MT in 2014-15 and likely to rise to 220-240 MT in 2015-16. Lower international prices offer some leeway to talk tough with the unions of the monopolist PSU Coal India Limited. Even if there are strikes and lower production, falling international prices will contain the damage due to rising imports. The government also has to reallocate coal blocks, but these will be valued at lower rates. CIL's disinvestment will also fetch less money.

Low oil, gas and coal prices give the government a breathing space to clean up an almighty mess in the energy sector. Thermal power generators can wipe out some accumulated losses; power users can reduce costs. There could be investment flows into gas-associated infrastructure, such as pipelines, port LNG terminals and city gas networks. PSU refiners should earn some profits. Costs will reduce for a host of industries like telecom service, transport/logistics, petrochemicals, aviation, shipping, plastics, fertilisers and railways.

The government will be able to reduce some subsidies in these areas. Ideally, it should go further with decontrols. But successive Indian governments have wasted chances to put energy and fertiliser policies on firm footings. There are no guarantees this chance will be taken.

If the government finds sustainable permanent solutions to stem huge losses in the power sector and engineers a turnaround in thermal generation, that would be a fantastic outcome. But it may not happen. There will be speculations on this theme and trading opportunities at least, even if it doesn't result in concrete solutions.

In contrast to conventional energy, the renewable-energy sector could see dwindling interest. It will require a strong policy support from the government. There is a good chance that policy support will continue if we go by the PM's actions in his former role as CM of Gujarat. Also, major Indian business groups like ITC, Tata, etc., are committed to meeting internal energy needs via renewable energy.

'Everybody', meaning a majority of analysts, investors and policy-makers, expect rate cuts from the RBI through 2015-16. There has already been quite a lot of investment into banking and non-banking financials. There could be new opportunities in debt funds focused on medium-term and long-term debt if a series of rate cuts is executed. Obviously, rate-sensitive stocks should gain because interest costs will reduce if rates drop. There could be enhanced FII flows into rupee debt if the government raises investment limits. A glance at the Bank Nifty's outpeformance shows how large the outperformance by rate-sensitive stocks might be if the RBI does cut rates.

Much of this is, by and large, positive for India. But on the flip side, the possibility of certain scenarios should prevent hyper-optimistic assumptions. The Nifty rose 32 per cent in calendar year 2014, by 6 per cent in 2013 and by 28 per cent in 2012. None of those years saw great corporate performance. This bull run is on the basis of future expectations. If that recovery does come about in 2015-16, there could be some profit-booking. On the other hand, expectations may not be sustained for a fourth year if there isn't commensurate EPS performance.

Also, the 2014 return was driven by FII buying (nearly Rs 1,00,000 crore), which far outpaced domestic institutional selling (Rs 30,000 crore). FIIs must keep faith in India in 2015 for the market performance to be sustained. Most emerging markets will do badly in 2015. India could be badly affected if FII sentiment about EMs deteriorates.

On the valuation front, the index P/E is at around 21 (last four quarters) at the current levels of Nifty, which is at 8,300. The average Nifty P/E since 2009 is 19.5 with a standard deviation of 2.6. The index valuations are on the higher side of historically acceptable valuations. Given the mean-reverting nature of market valuations, there are statistically larger chances of correction than of rise.

The other issues could be global themes. If the American GDP does not grow as projected, there could be global corrections. There could also be corrections if crude prices spike up on fears of supply disruption. Russia, Iraq, Venezuela, Iran, Libya are all politically volatile. In addition, of course, there are hard-to-price negative possibilities like big terrorist strikes or the assassination of some world leader or sudden deterioration in the geopolitical environment.

Nobody is expecting a crash in 2015. A contrarian would say that is sufficient reason to expect one.

The writer is an independent financial analyst.

This column appeared in the February 2015 Issue of Wealth Insight.