Market Outlook: Here’s why stock market looks optimistic for CY24

Key reasons for the positive view despite the high valuation are robust corporate growth, the continuation of the reformist growth of India, and a relaxation in global inflation. For H1CY24, we expect a pre-election rally, and the global environment is also supportive of a drop in geo-political tension and high interest rate risk. We expect the return of FIIs inflow, which was volatile in CY23 for the secondary market. 

However, elevated valuations and a slow global economy are likely to limit the degree of gains in equity.  For example, the US and India are targeting at one year forward P/E of 19-20x, above the long-term average while economic growth will be lower than CY23. However, we do not forecast a deep issue in the market, as the global economy is forecast to avoid a recession and improve its path in CY25.

The domestic concern stems from being in an El Niño year, sparking food inflation with forecasts indicating lower Kharif and Rabi production compared to the previous year. This is expected to have a negative impact on the rural, agriculture, and FMCG sectors, potentially influencing the CY24 rally. Nevertheless, the broader market’s repercussions are likely to be confined to specific sensitive stocks and sectors. The government is actively implementing corrective measures to enhance supplies and exercise price control in response to these challenges. 

But the overall market is good enough to support a multi-asset allocation with a focus on diversification strategy. In addition to equity, we can expect other assets like debt, realty, and commodities to provide decent returns due to a drop in risk, high interest income, and an upside in the domestic economy.  In equity, we are more positive on large caps compared to mid & small caps. The earnings growth of Nifty100 index in H1FY24 was 35%, while price performance was 15%, indicating undervaluation.

We anticipate favorable returns on non-equity assets too, by taking low risk, including debt and commodities. High interest income and changes in monetary policy have improved the outlook for debt paper. In the Indian landscape, current interest income opportunities range from 7% to 10.9% for a AAA and AA credit rating paper (low risk.  With an expected negative trajectory in future yields, the prospect of capital gains in bonds is further enhanced, improving the overall return to approximately up to 15% over a 12 – 18month horizon.

The outlook on commodities like metals (gold, silver & copper) is also positive in anticipation of a weakening in the US dollar with a reduction in the economy and interest rate. It is a good year to consider multi-asset investments as a cut in the Fed rate in CY24-25 is positive for gold, while metals like silver, copper and rare earth are in a positive mode due to renewables & govt fiscal. India is pushing for manufacturing & infrastructure, indicating positiveness on commodities. It is a good time to diversify your portfolio when equity is expensive.

Within the equity sphere, our preference lies on large caps due to their advantageous peer valuation and fueled by the resurgence of FIIs inflows. We need to be stocks and sector specific. Sector-wise, we like Banks, Manufacturing, Cement, Chemicals, Construction, Infra and Pharma. Mixed on Auto/Ancillaries. Neutral on Capital Goods, Defence, FMCG, IT, Power and Realty due to high valuation. Overall, we are positive on CY24; however, H2 performance will depend on the outcome of the national election, the final budget, and the continuation of corporate earnings, which we forecast to be stable.

The author, Vinod Nair, Head of Research at Geojit Financial Services.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 24 Dec 2023, 02:13 PM IST