The year 2023 unfolded as an intriguing period, not only for the Indian equity market but also on the global markets’ front. We commenced the year with restrained expectations and witnessed a notable amount of volatility in the initial months on account of a) Rising COVID-19 cases in China, b) Lockdown in the Chinese economy, c) Hawkish Central Bank, d) Rising bond yields, and e) Other macroeconomic challenges. These developments kept the equity performance subdued for the first few months.
However, in the second half of the year, the Indian market witnessed a remarkable recovery from its Mar’23 bottom and the broader market outperformed the Largecap companies by notable margins. The positive developments in the country were supported by a) Improving high-frequency indicators of the domestic economy after a growth-oriented budget, b) Superior growth outlook vis-a-vis other emerging markets, c) Status-quo maintained by the RBI in Apr’23 MPC, d) Supportive valuations after the correction seen in the first three months of 2023, and f) Returning FIIs in the domestic market. Buoyed by these favourable factors, the Indian benchmark index Nifty-50 grew by 18% on a YTD basis till 22nd Dec’23 vs. the 2.7% growth delivered by FTSE emerging market index during the same period. Even more impressively, Small and Midcap indices emerged as the true winners during this period, displaying substantial growth of 43% and 46%, respectively.
Market touched an all-time high in Dec’23: Benchmark index Nifty-50 scaled to an all-time high level and closed at 21,457 on 15th Dec’23. This commendable growth was led by three back-to-back events that turned in favour of the equity market. These were 1) The results of the assembly elections in 3 out of 4 key states that raised the expectations of policy continuity in 2024 and thereby boosting the market confidence, 2) The status quo maintained by the RBI along with a positive revision in FY24 GDP from 6.5% to 7%, and 3) Dovish narrative by the US FED in the FOMC meeting. With this, the Indian market cap touched $4 Tn for the first time in Dec’23. India is now the 5th largest market in the world and stands tall among global economies. Only the US, China, Japan, and Hong Kong markets are currently ahead of India.
Faith in India’s growth story continues: Investors, both domestic and foreign, have actively demonstrated confidence in India’s long-term growth narrative. In FY24 so far, DIIs and FIIs have invested $12 Bn and $23 Bn, respectively, in the Indian equity market till 22nd Dec’23. After being net sellers in FY22 and FY23, FIIs regained confidence in FY24 and the sentiment was further reinforced by the BJP’s big-bang performance in assembly elections across three out of four key states. The anticipation of political continuity in the upcoming 2024 general elections has heightened market confidence, providing increased visibility on policy continuity. This, in turn, is expected to sustain the growth momentum of the domestic economy moving ahead. In light of these factors, we foresee that the Indian equity market will maintain a higher premium to emerging markets (EM) over the next year. This positive outlook would be further supported by a) A strong earnings forecast, b) The improved health of the banking sector, and c) Encouraging expectations in the Private Capex cycle.
Outlook 2024: The Indian economy continues to be a ‘star performing’ economy as against other emerging markets. Moreover, we firmly believe that it is likely to continue its growth momentum in 2024 and remain the land of stability against the backdrop of a volatile global economy. The majority of the high[1]frequency indicators are trending upwards and the uptick from the pre-Covid levels is visible, indicating the resilience of the Indian economy. On top of it, the macroeconomic scenario has changed in favour of the equity market in the last one month and multiple indicators are now indicating a positive start for 2024. It is also noteworthy that the US bond yields witnessed a correction of 110bps from its peak in the last one month, which is further supporting the rally. Overall, the country’s macro set-up is positive. The fundamentals of Indian corporates have improved significantly and so has the profitability across the board. This can be seen in the cumulative and rolling net profit of the NSE 500 universe for the last 4 quarters (till Q2FY24), which crossed the Rs 12 Lc Cr mark. Moreover, after a muted performance for several years, the ROE of the broader market is improving as well. The bolstered balance sheet 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, supported by robust double-digit earnings growth. We foresee Nifty earnings to post 14% CAGR growth over FY23-26. In our base case, we foresee the Dec’24 Nifty Target at 23,000. For our base case, we assume the continuation of the political stability and consequent visibility on the policy continuity after the 2024 General Elections.
Key Monitorables in 2024: Multiple events are lined up in 2024 and the market will continue to closely monitor the developments around them. These key events are: 1) Interim Budget; 2) General Election 2024; 3) Expectation of the FED rate cut around May-Jun’24; 4) Full-year budget around Jul’24 after the formation of new government; 5) Expectations of interest rates cut by the RBI in sync with global rate cut, and 6) US Election in Nov’24. The above[1]mentioned events are expected to keep the Indian equity market volatile and it could respond in either direction based on the developments. In any case, we continue to believe in the long-term growth story of the Indian equity market and believe it to be well-supported by the favourable structure emerging, with increasing Capex enabling banks to improve credit growth. With current valuations offering a limited scope of further expansion, an increase in corporate earnings will be the primary driver of the market returns moving forward. Hence, bottom-up stock picking with a focus on a combination of old economy + export stories would be a key to generating satisfactory returns in the next one year.
