Jan 2024 after 2 very good months of Nov & Dec 2023 was a period of consolidation in the Indian markets. Nifty 50 was almost constant while Sensex fell by -0.74%. The midcap and small cap however continued to rise by 3.8% and 4.2% respectively. Global markets performed well, especially the USA indices. S&P 500 generated 1.7%, DJIA 1.3%, Nasdaq 100 1.9% while Russell 2000 dropped by 3.9%. USD 2-year yield ended at 4.23 % while the 10-year yield was at 3.94%.
The interim Union budget on Feb 1, 2024 ( vote on account because of impending elections ) showed fiscal rectitude with the government setting an ambitious target for the fiscal deficit at 5.1% of GDP. It showed a well-balanced fiscal roadmap, strategic resource allocation, and a focus on sustainable development. Financial markets responded well with the 10-year bond yield coming down to 7.05%. The impact on financial markets and potential shift in the RBI monetary policy highlight the positive implications of this budget for India’s economic trajectory in the coming years.
FOMC held the rates steady at 5.25%-5.50% in their most recent meeting on Jan 31, 2024, as the Fed still waits for inflation to ease a bit more. The Fed signalled that rates could begin to fall in the near future, but they will keep an eye on changing economic conditions. The market continues to adhere to the soft landing scenario.
The view on Indian conditions continues to remain favourable. The Indian economy looks very resilient and continues to be the fastest-growing large economy with an expected GDP growth of 7% in FY 24, surpassing expectations. The inflation numbers are also encouraging and RBI will have more leeway to gradually decrease rates perhaps late in 2024. Corporate earnings continue to grow at a good rate and the latest high-frequency economic indicators are robust.
Therefore, our bullish market view remains intact. The long-term economic progress in India and the equity uptrend is likely to continue, though with episodic corrections. Indian recovery is based on 3 main factors of sound sustainable macro policies, continuing flows, and steady growth in corporate earnings. FII flows are undoubtedly volatile but domestic flows remain resilient and are actually increasing.
Overall, for the medium-term goals (anything above 3 years), allocation to equities should remain on the higher side. Fresh money could be invested in tranches, utilizing the STP route- systematic transfer plan. Additionally, because of the broad-based nature of Indian growth, selected schemes should belong to categories, that allow easy movement from one cap to another, and a few examples are Large Midcap, Multicap, Flexicap, and Focus.
Also as always, with the global uncertainty, some part of the portfolio should always be invested in high-quality short-term debt funds to take care of liquidity and any contingencies. Similarly, for short-term goals, equities because of their volatile nature, should not be deployed. Equity savings schemes or balanced advantage schemes, because of their hybrid nature, or multi asset funds may be utilized for goals with a time horizon of 2-3 years. Portfolio construction should be sequential in the order of liquidity, safety, and yield-enhancing components.