As part of a global equity rally, Indian shares have logged about 7 percent year-to-date, and are currently perched close to their all-time highs. But the rally was largely driven by easy liquidity sloshing around because of the loose monetary policies of the US Federal Reserve and other central banks, Bharat told CNBC-TV18 in a discussion.
As a result, as the Fed starts to unwind its stimulus that it unveiled in the aftermath of the 2008 financial crisis, stocks will take a hit, he said, adding that the Fed could wind down its monetary stimulus by late 2014 or early 2015.
"So the liquidity flows that played a large role in the 2013 rally will not play the same role in 2014 and if India is to witness good equity performance, it has to be on the basis of strong fundamentals of the Indian economy and I think we are a fair distance from that," he said.
"Indian equities could correct for the first quarter of 2014 or all the way through two or three quarters, before beginning a sustained bull market rally towards the end of 2014," Bharat said.
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When asked what strategy investors could adopt in an environment where his prognosis comes true, he said individual investors' allocation to stocks could be 10-20 percent, which could be increased to 50-60 percent towards the end of 2014.
Even this year, developed markets such as US have outperformed Indian markets – the S&P 500 has clocked a 30 percent gain -- and Bharat believes the outperformance is likely to continue into 2014. "Even within emerging markets, stocks in countries like Malaysia, Indonesia, Vietnam, Taiwan, which are making fairly significant strides [are likely to do well]."
Volatility could also increase thanks to the central-government elections due to take place in May next year, Bharat said. "For every single opinion poll starting from the end of February, people are going to come up with different outcomes and with the publication of each these polls you are going to have huge volatility."
"So the only thing you can say with certainty about 2014: It is going to be very, very volatile."
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