Warren Buffet once said that the only role of stock forecasters is to make fortune tellers look good. That advice from the sage of Omaha hasn't stopped equity strategists from predicting what the markets have in store for us at the beginning of every year.

2005 is no exception, and it's that time of the year when crystal balls are polished, tea leaves read and tarot cards studied, even by level-headed people who don't normally indulge in this sort of activity.

But before we consider where the market will be in 2005, let's take a look at whether the predictions for 2004 hit the target.

At first glance, the market strategists seem to have done very well indeed, coming within a whisker of predicting exactly where the Sensex ended up.

HSBC's equity research wing, for instance, forecast at the end of 2003 that the Sensex would end 2004 at 6,564, and it pointed out that the elections could be an "inflection point", persuading investors to take money off the table.

Citigroup's Smith Barney predicted a Sensex target of 6,600, listing as risk factors a reversal of the downtrend in interest rates and unexpected surprises from politics.

Merrill Lynch prognosticated that the Sensex would end 2004 at 6,500, and it too noted that the nature of the new government was a concern.

HDFC [Get Quote] Securities had the same Sensex prediction, but stuck its neck out on the elections, predicting that "the National Democratic Alliance government has a strong likelihood of coming back to power." They can hardly be blamed -- that's precisely what every political pundit was predicting.

Enam Securities, while praising India as "the place to be in", also talked of a "short-term correction due to political uncertainty and global question marks". UBS was the big bull at the end of 2003, with its Sensex target of 7,240 by the end of 2004.

But it too pointed out that a Congress victory was a "near-term risk to market valuation". Bang on target, however, was BCA Research.

Commenting on the global equity markets in early January, it clearly said that while "the cyclical bull market will prevail throughout the year...stock prices will not progress smoothly...the door is still open to a blow-off extending into the second quarter". The worldwide meltdown in emerging markets in May proved that prediction correct.

Look a bit more closely, however, and much of the remarkable prescience displayed by the experts in predicting the Sensex disappears.

Confidence evaporated when the markets plunged in May, and soon brokerages were busy revising their year-end Sensex predictions.

CLSA, which had earlier predicted the Sensex at 6,400, brought its 12-month target down to 4,950. J P Morgan, however, maintained its conservative Sensex year-end target of 5,400.

Smith Barney cited the new government's dependence on the Left as a concern, and revised its target down to 5,800. In June, a UBS report said that they were worried about the sustainability of the industrial upturn.

To be fair, however, there were several honourable exceptions. These included SSKI, which saw fit to maintain its Sensex target at 6,200. Franklin Templeton said that the Sensex at post-May levels was undervalued.

Enam's June report was titled "Buying Time for Smart Investors". And Merrill Lynch's June report accurately cited large cash position in global emerging market equities as the basis for a summer rally. That didn't prevent it, however, from having a year-end Sensex target of only 5,300 to 5,500.

Targets were often hit despite the wrong assumptions. For instance, many researchers said that there would be an upsurge in domestic inflows to drive markets higher. That didn't happen. Others predicted that inflation would remain benign. Some predicted a range-bound market.

The revival of investment demand from corporate India was supposed to be another growth driver. While corporations have indeed announced large capex plans, most of them are yet to materialise.

As a matter of fact, even the International Monetary Fund went dramatically wrong about the markets. In its Global Financial Stability Report in April, it drew attention to the parallels between 2004 and 1994, and warned that rising interest rates in the US could result in drying up of inflows to emerging markets, causing them to crash.

That did indeed happen in May, but the later recovery was not something the IMF had envisaged. Many market-watchers, including this writer, were fooled by the May meltdown in emerging markets, read in the context of the IMF's warning.

What this brief survey of market opinion in 2004 indicates is that while the initial predictions were mostly on target, it was tough for many analysts to discount the unprecedented negative events of May 17, and they allowed themselves to be unduly influenced by them.

In the words of Smith Barney's equity strategy piece for 2005, "...while news flow and liquidity trends may push markets temporarily into under and over-valued territories, prices would look to settle around fair value once the dust settles." Many of these brokerages forgot their own credo.

What do the pundits predict for 2005? Taking Smith Barney first, because they've clearly indicated their philosophy, we find a Sensex target of a mere 6,700 by end-2005, the main themes for the year being capex and rupee appreciation.

Thankfully, it says there is considerable support at lower levels. Franklin Templeton's Mark Mobius says that while India looks good, it's time to do some stock-picking, rather than betting on the market. Enam Securities predicts that, given an EPS (earnings per share) growth of 20 per cent and a market PE of 14, the Sensex will be 7,902.

The dampeners -- rising interest rates, higher oil prices; the positives -- rising consumption and capex, foreign institutional investor inflows and domestic money flowing into markets.

Morgan Stanley, on the other hand, is certainly not bullish, with the piece on India in their Asia strategy report headlined, "Equities are a risky proposition". The report says that the market is already 20 per cent above fair value and that the risks are rising.

Nevertheless, it qualifies that statement by agreeing that "stock market returns could remain strong until the Budget, thanks to liquidity.

And BusinessWeek has said that India, along with China, Brazil and Russia, are four countries that the investor must own, comparing investment in these countries to investing the turbulent markets of 19th century America.

BCA Research says that while foreign purchases into global emerging markets are strong, levels have not reached heights associated with previous market peaks.

Most brokerages believe that the Indian market is not cheap compared to other emerging markets, although it is also true that earnings growth is forecast to be higher than that for most emerging markets in 2005. Given this scenario, the time when a rising tide lifted all boats may be past -- picking the right stocks becomes important.

But let's consider what made the markets rise in 2004. First and foremost, despite the hype over the India story and more FIIs coming to the country, the performance of the Indian market has been more or less in line with that of emerging markets.

The Morgan Stanley Capital International index for Pakistan, for instance, gained more than the MSCI India index in 2004. The most important factor for the market, therefore, is the continuation of flows to emerging markets.

What do these FII flows depend on? The clear-cut negative correlation between the weakness of the US dollar and the strength of emerging markets indicates that as long as the dollar falls, inflows into emerging markets will continue and emerging market equities will rise.

But dollar weakness also has other consequences -- it stimulates growth in the US, ensuring that exports from the rest of the world stay strong.

Rupee appreciation also makes imports cheaper, helping keep inflation down, while continuing portfolio inflows help to keep liquidity abundant and interest rates low. Both interest as well as raw material costs for India Inc are affected by the level of the rupee.

Part of the liquidity in emerging markets gets added to central bank reserves, which are invested back in the US debt markets, keeping interest rates low there as well, and continuing that country's debt-fuelled consumption.

This, in a nutshell, is what set the stage for the bull run in global markets in 2004, barring that blip in May. Add to that, plenty of volatility because hedge funds borrowed at negative real interest rates in the US and used the money to play the emerging market equities, oil, commodities, currency and gold markets.

What investors need to look out for in 2005 is, accordingly, any change in these trends.