Stock markets reversed their weak start to close slightly higher on the first day of trading in 2024. The BSE Sensex closed at 72,271.94, up 32 points or 0.04 per cent. The NSE Nifty 50 ended 11 points or 0.05 per cent higher at 21,741.90 level.
Monday's positive start follows a strong year of gains for equity market investors in 2023. The benchmark Sensex closed near 19 per cent higher last calendar year. Small and midcap investors saw even bumper returns in 2023. The BSE Smallcap index, for instance, accelerated almost 48 per cent, while the midcap index returned 46 per cent.
The Nifty 50 touched its life high of 21,801.45 on December 28, 2023 and the Sensex hit 72,561.91 on Monday, January 1. The Indian market cap touched $4 trillion for the first time in December 2023.
"The commendable growth was led by three back-to-back events that turned in favour of the equity market. The results of the assembly elections in three out of four key states that raised the expectations of policy continuity in 2024 and thereby boosting the market confidence; the status quo maintained by the Reserve Bank of India, along with positive revision in FY24 GDP from 6.5 per cent to 7 per cent; and dovish narrative by the US Federal Reserve," said Neeraj Chadawar, head of quantitative equity research at Axis Securities.
After being net sellers in 2022, foreign institutional investors pumped in more than Rs 1.71 lakh crore in India's equity markets in 2023, as India emerged among the fastest growing economies amid global geopolitical and economic uncertainties. At the same time, domestic investors too remained net buyers. According to Association of Mutual Funds of India (AMFI) data, equity mutual funds saw inflows of over Rs 1.44 lakh crore between January-November.
India added $900 billion in market cap in 2023, equivalent to the entire market cap of countries such as Brazil, Sweden and Netherlands, according to Pantomath Financial Services Group.
India's economy is likely to maintain its growth momentum in 2024, which will continue to attract foreign investors. Furthermore, expectations of global central banks, including Federal Reserve, beginning to cut interest rates this year will make equities further attractive.
Chadawar of Axis Securities noted that after a muted performance for several years, the return on equity of the broader market was improving.
"The bolstered balance sheets strength of corporate India and the significantly enhanced health of the Indian banking system are additional positive factors. These elements are poised to facilitate Indian equities in achieving double-digit returns over the next 2-3 years," he said.
Indian companies are benefiting from softening commodity prices, in turn leading to enhanced profitability and margins.
"Companies are expected to continue strong performance in the upcoming quarters, driven by a robust domestic demand environment, positive macroeconomic factors and private capex revival," pointed Mahavir Lunawat, managing director, Pantomath Capital Advisors.
Demand in mass market and rural segments had remained muted due to inflationary pressures. A moderation in inflation could support a recovery in the mass market segment, further strengthening the ongoing economic upcycle, said George Thomas and Christy Mathai, equity fund managers at Quantum Asset Management.
Much of the capital expenditure spending so far has been government-led. But, private capex is also showing early signs of revival. Buoyant demand environment along with a pickup in utilisation could strengthen the private capex trajectory, noted Thomas and Mathai.
Investors will have to be selective though, given that many of the sectors have already seen favourable earnings cycle along with stellar returns, they further said.
"Favourable credit cycle coupled with a revival in corporate credit offtake can drive earnings of banks. A likely soft landing in the US can trigger a faster conversion of deal wins to revenue in IT sector," said the Quantum fund managers.
While, no large correction is likely in equity markets this year, the bulls may also slow down, feel analysts.
Anurag Singh, quantitative strategist at Kotak Institutional Equities says he is wary of the absolute return potential of the market from here on.
"As per our Nifty fair value model, the index is now close to 20 per cent overvalued. Thus, we do not anticipate a large upside to the index from this point. The most likely outcome for the index in the next 6-9 month period seems to be a time correction," said Singh.
There will be multiple events that the investors will be monitoring this year. There is the interim budget in February, general elections later in the year, followed by the full year budget around July, post the formation of the new government, possibility of the interest rate cuts by the Federal Reserve towards the middle of 2024, expectations of RBI cutting rates in sync with global rate cuts and the US presidential elections in November.
In this backdrop, equity markets could remain volatile, said Chadawar of Axis Securities. While, he still believes in the long-term growth story of the Indian equity market, he too said that current valuations offer a "limited scope of further expansion" and increase in corporate earnings would be the primary driver of market returns ahead.
"Hence, bottom-up stock picking with a focus on a combination of old economy plus export stories would be a key to generating satisfactory returns in the next one year," said Chadawar.
Axis Securities expects Nifty earnings to grow at a 14 per cent compounded annual rate over financial year 2023-2026. In the base case, Axis Securities sees Nifty at 23,000 by December 2024, that is a 5.8 per cent upside to its Monday's closing.
