1. What are the top three tailwinds and headwinds facing equity markets going forward?

The equity markets in 2024 are expected to be influenced by a mix of tailwinds and headwinds. A primary tailwind would stem from the easing of monetary policy by central banks in developed markets, including the anticipated interest rate cuts by the Reserve Bank of India. The degree of monetary policy easing could significantly impact equity markets.

Another positive driver is the continuation of earnings growth momentum. The Nifty EPS growth for FY25 is projected at around 16%, following a robust 22% growth expected in FY24. Additionally, FII inflows are expected to remain strong in 2024, supported by robust economic growth and India’s inclusion in a global bond index.

On the flip side, the markets could face significant headwinds from geopolitical conflicts. The escalation of the Middle East conflict or the Ukraine-Russia war could potentially trigger a global correction in equities. Furthermore, the upcoming general elections in India pose a risk; unexpected electoral results could lead to market volatility.

2. Is 2024 anticipated to be a year characterized by rate cuts, and how do you perceive the pace at which rates will decline in the US?

The interest rate hike cycles in developed markets have likely peaked, paving the way for monetary policy easing starting this year. However, the markets seem overly optimistic about the extent of rate cuts in 2024. Central banks, including the Fed, will likely be cautious, ensuring not to undermine the progress made in controlling inflation by easing policy prematurely.

The Fed is expected to proceed cautiously, probably delaying rate cuts until inflation is sustainably aligned with the 2% target. Market expectations of an early Fed rate cut in 2024 seem aggressive. While inflation has receded from its peak, it remains above the target, and further declines are expected to be gradual. Nonetheless, about three rate cuts, as indicated in the last dot plot, are likely, possibly in the latter half of the year.

3. There’s a viewpoint that the Small & Mid Cap segment in Indian Equities has become expensive, warranting caution until a significant correction occurs. Do you agree with this perspective, or are you more optimistic about the segment’s prospects?

The Small-cap and Mid-cap segments in Indian equities are currently trading at notably elevated valuations. For instance, the NIFTY Small Cap 250’s P/B ratio is nearly equivalent to the NIFTY 50’s, around 3.7-3.8, despite historically trading at a significant discount. Similarly, the NIFTY Mid Cap 150, with a P/B ratio of approximately 4.1, is valued higher than the NIFTY 50, compared to its usual discounted levels. Therefore, large caps currently present a more favorable risk/reward ratio compared to small and mid-caps.

4. Which sector or thematic trend do you believe will perform well irrespective of global risks, and uncertainties surrounding domestic elections?

We are bullish on the power sector in India, considering the country’s increasing demand for power due to industrialization, urbanization, and population growth. India is witnessing a resurgence in peak power shortages, reaching 4% in FY23. This trend, coupled with sustained high single to early double-digit growth in power demand over the last 24 months, positions Indian power utilities and equipment companies for substantial gains.

The Industrials sector also shows promise. We observe a consistent strong order flow each quarter in this sector. With the central government prioritizing capital expenditure, robust state ordering, and the beginning of private capex, we expect the award momentum and execution pace in this sector to remain healthy.

5. How do you see sector weights change in the composition of Nifty 500 as we see approach a market capitalization of $6 trillion by the end of this decade?

Looking towards the end of this decade, as India’s market capitalization approaches $6 trillion, significant changes in the Nifty 500’s composition are expected. The manufacturing sector’s share of the GDP is anticipated to rise, reflecting in the index composition. India’s manufacturing is set to ascend the value chain, moving towards high-value-added products like electronics, electric vehicles, and processed foods.

Additionally, new-age technology-driven businesses, such as the platform companies, are likely to gain a larger share in the Nifty 500, supported by India’s robust digital infrastructure. Capital market intermediaries should also perform well, benefiting from the shift in financial savings from traditional avenues to equity and debt markets. Finally, lifestyle product companies are expected to see an increased share, driven by an aspiring middle class.