February 28, 2024

Sensex, the benchmark equity index, closed at an all time high of 70,514.2 on December 14, 2023 which translates into a 16 percent annual return. This comes after the Sensex doubled between March 2020 (29,468), post-COVID correction and December 2022 (60,840) in 2.75 years.

2023: Strong Buying By FIIs, Domestic MFs

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This robust performance has been made possible due to multiple factors:

*Strong FII buying of more than Rs 1 lakh crore in 2023 vis-a-vis net sellers to the extent of Rs 1.21 lakh crore in 2022.

* Sustained buying by domestic mutual funds. Investing in equity schemes almost quadrupled from Rs 5.7 lakh crores in March 2020 to Rs 20.3 lakh crores in November 2023.

* BJP winning all the 3 Hindi Heartland states Rajasthan, Madhya Pradesh and Chhattisgarh has provided momentum to the markets, signaling return of NDA in 2024 general elections.

The performance in the Indian stock markets has not been in isolation. Despite concerns over recession SPX 500 (the US benchmark equity index) has delivered 22 percent returns in the last one year.

The performance of Indian stocks has been far more widespread as compared to the previous years. An analysis of the different sectors shows that 10 of the 15 sectors have delivered higher returns than the benchmark Sensex from April 2020 to November 2023 period.

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2024 – Momentum Till General Elections

Sensex has risen 5.3 percent this month since exit polls were released on November 30.  BJP’s victory portends continuity in policies and programmes addressing concerns that Congress party’s victory might have stoked a fiscally populist agenda. With latest opinion polls predicting a NDA return, the markets are likely to maintain this momentum till the general election results in May next year.

The uptick in domestic participation, record number of demat accounts being opened year after year and all-time high collections of SIP with flows at Rs. 17,073 crore for the month of November 2023 provide cushion to the markets.

High earnings growth of corporates in 2024 is likely to provide a fillip to the markets. HSBC forecasts earnings growth of 17.8 percent for India in 2024 — among the fastest rates in Asia. Sectors such as banks, health care and energy, which have already done well this year are best positioned for 2024, according to HSBC.

India continues to be the fastest growing major economy in the world. GDP growth in the second quarter of financial year 2023-24 was much better than market expectations at 7.6 percent led by a strong rebound in the manufacturing sector.

The market players are expecting a rate cut next year as inflation cools down to 5 percent levels. Lower interest rates tend to increase liquidity as investors move from low return products like FDs to equity markets.

The US Fed too has signaled that its interest rate hiking policy is at an end and it will cut rates in 2024. Market analysts are now projecting up to three rate cuts of 25 basis points each in 2024.

This had a notable impact, propelling the Dow Jones Industrial Average beyond the 37,000 mark for the first time. The US Treasury 10-year yield crashed to sub 4 percent levels which could trigger large capital flows to India.

Indian equities have historically aligned to FII inflow movements. Most of the time Sensex delivers positive month-on-month growth whenever FIIs are net buyers, which holds true for around 70 percent of the time.

2024 – Risk Factors

The market capitalisation to GDP ratio has been hovering consistently above 100 percent in the last twelve months. When MCap/GDP ratio breaches 100 percent, Sensex tends to correct. Traditionally many believe being over 100 percent indicates the market is overvalued, while others see the “new normal” is closer to 100 percent as the number of IPOs have increased.

Amidst the high interest rate scenario prevalent globally, geopolitical tensions and developed countries focusing on deglobalisation due to domestic growth challenges, India’s economic growth might take a breather in 2024.

While S&P has revised its financial year 2023-2024 GDP growth forecast to 6.4 percent from 6 percent as “robust domestic momentum seems to have offset headwinds from high food inflation and weak exports”, it has lowered the growth projection for financial year 2024-2025 to 6.4 percent from 6.9 percent earlier.

The sentiment is positive as we enter into 2024. However, caution is warranted especially while investing in small and mid cap stocks where valuations are expensive. Investors should invest with a long term perspective, maintain asset allocation and sufficient liquidity given overvalued markets.

Amitabh Tiwari and K Shankar are co-founders of Finanza Personale. Views are personal and do not represent the stand of this publication.