Our Market View

Sanjiv Mehta  |  2024-01-01

January being the first month, inevitably view taking is not only from a monthly perspective but also how it would be as a subset of a macro annual view. Additionally, in the same vein, one also looks at how the past year has gone by.

The year 2023 was a very good year with indices moving up significantly. Nifty 50 and Sensex rose by 19.9% and 18.7% respectively. The midcap and small cap performed even better with the broad BSE 500 index delivering 24.7%. Global markets also performed well, especially the USA indices. S&P 500 generated 25.6% while Nasdaq 100 was the most impressive with close to 50% returns.

2024 is going to be an important year, with significant events taking place. First, there will be more than 70 elections in 2024 in countries that are home to around 4.2 billion people, more than half of the global population. Most ballots cast will be in Asia- India, Bangladesh and Indonesia. Other countries going to the polls include USA, Britain, Mexico, South Africa, and Taiwan. In addition to India, the most important election is in USA with the result having global consequences, affecting everything from climate policy to military support for Ukraine. Second, the Middle East turmoil will be closely watched, it has the potential to become a wider regional conflict but also offers a new chance for peace. Third, the new Cold War rhetoric is hardening between USA and China as China’s growth slows and tensions rise over Taiwan. Fourth, the clean energy transition is minting new green superpowers and redrawing the energy resources map. Fifth, Artificial Intelligence’s role is increasing as more businesses adopt it and regulation develops.  Worries abound about AI’s effect on jobs and the potential for election meddling. 2024 also has major sports events with the Olympics in Paris and the T20 cricket World Cup in the USA.

Economically, the year is ending on a very good note with two major developments that can have a beneficial impact on the markets in the new year 2024. First was the Fed pivot where the central bank showed its intent to cut rates 3 times during the next year as compared to the previous expectation of keeping interest rates higher for longer. That led to the markets taking a ‘risk on’ stance where the risky assets including equities perform better. Second event was the Indian state elections results which largely went in the BJP’s favour. It provided confidence to the markets that there will be continuity and stability in India rather than any disruption due to the federal elections in May 2024.

Globally, the conditions are favourable with economists rating the probability of a USA recession as low and giving credit to the Federal Reserve for engineering a soft landing, essentially bringing down the inflation gradually without a significant economic slowdown. The important troika of USA treasury yields, USD index, and oil prices have swung in a much more favorable direction during the last 2 months. USD 10-year yield which had touched 5%, is now at a level of 3.86%, Brent Oil which had reached almost 95 USD per barrel is now close to the 77 USD index which had touched a high of 107.5 during the year is now at 101.4.

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 market view for 2024, even taking in account the present high levels of various stock indices, 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.

Risk factors for the new year mainly relate to geopolitical events. Unexpected election results can induce uncertainty. Any escalation of the Ukraine war,  Hamas conflict, or Taiwan tension could be unsettling. Oil price increase is another factor detrimental to the Indian economy. India took in its stride the loss in the final of the ODI World Cup, therefore adverse T20 result is not a major risk factor. Present inflation decline and soft landing cannot be taken for granted. Markets are at a higher level and the expectation is that of multiple interest rate cuts. Therefore, there is more vulnerability to negative surprises as compared to the beginning of 2023.

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 and 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, 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.