Q1: What are the top three tailwinds and headwinds facing equity markets going forward?
With global liquidity tightening nearing its end, India appears to be relatively better positioned vis-Ã -vis global peers on growth and conducive macro conditions. Key tailwinds being continued corporate earnings momentum, benign commodity prices outlook along with likely political stability supporting policy continuity and government capex led growth. That said, key risks that remain are in the form of a) Global growth slowdown, b) escalated geopolitical tensions and c) any negative surprise of Covid like pandemic again.
Q.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?
Globally higher for longer seems a reality with sticky inflation, flaring of a geo-political crisis and continued worry of recessionary trends across developed markets (DMs). Amid these macro conditions the dichotomy between the Fed’s recent benign guidance of three rate cuts in 2024 instead of two and the continued hawkish stance of ECB and BoE is likely to add to uncertainties. It will be important to track the commentary of global Central Bankers (US Fed, BOE, EU) response to inflation data and if they believe that they need to move from inflation targeting to nurturing growth, which will drive the pace of rate cuts in the US.
Q.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?
Agree, quite a few small & mid cap stock valuations have turned expensive trading above their long-period averages and fair valuations. Nifty Midcap 100 (+47% YoY) and Nifty Smallcap 100 (+56% YoY) both are trading at life-time highs and have outperformed Nifty 50 returns by a record margin of 27% and 36% respectively as on 31Dec2023, trends last witnessed in 2006 (as per Bloomberg data). It however appears to be different this time, as resilient retail inflows of USD22.3b in CY23, with monthly SIP inflows of ~USD2b/month (hitting new highs) led by willingness of retail investors to increase allocations to small & midcap stocks. We suggest a bottom up investment strategy in small & midcap with exposure to high quality companies with long runway growth opportunities and sustainable moats underpinning good visibility on earnings/cash flow growth. This apart, improved stock liquidity and longer investment horizon should help amid likely expectation of heightened market volatility ahead.
Q.4 Which sector or thematic trend do you believe will perform well irrespective of global risks, and uncertainties surrounding domestic elections?
The global opportunities may shift, domestic macro outlook may deteriorate and political winds will blow as they will…….but, ‘Earnings are Still like Gravity’. Market usually tend to reward earnings growth over the medium-long term. B2B growth businesses are better poised in the near-term compared to consumption proxies given the risk of slow rural recovery. A bottom up portfolio strategy for stock selection focusing on earnings growth compounders should help generate healthy positive returns.
Q.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?
India’s journey towards market capitalization of $6 trillion by the end of this decade will likely be driven by the economy moving steadily towards gaining its position amongst the top three economies in the world. This period of sustained high growth will ensure that flows to equities remain strong towards high earnings growth sectors. Financials and capex-linked stories will lead the cycle followed by a broader recovery in consumption. This apart, the room for a multi-year real estate cycle, power cycle and the rising FCF of Indian corporates that could help an eventual industrial capex recovery. Renewed focus on manufacturing, a more sustainable services export cycle, favourable geopolitics and benefits from digitization are additional support factors. From a longer-term perspective, the China-Plus-One theme has been gaining steam and several sectors linked to that theme will be beneficiaries.
