Markets end in green for 8 years in a row, outlook positive for 2024

Since 2002, the Sensex and Nifty have experienced annual declines only three times: in 2008, 2011, and 2015.

The Indian equity market ended the year in green for the eighth time in a row, despite a headwinds such as rising interest rates, bank collapses in the US, geopolitical crisis emerging from two ongoing wars, rising crude prices, and a slowdown in the Chinese economy.

The Sensex and the Nifty ended up 18 percent and 19.6 percent, but the bigger jump has come in second line shares with the BSE Midcap and BSE Smallcap up 43 percent and 46 percent.

On the flip side, valuations are anything but cheap, making a section of investors wonder if the uptrend can sustain in the year ahead. According to Bloomberg data, the BSE Sensex is trading at 20.56 times its one-year blended forward earnings while its 10-year average stands at 18.11 times. The Nifty50 index is trading at 20.11 times its one-year forward earnings and its 10-year average of 17.5 times.

Since 2002, the Sensex and the Nifty have experienced annual declines only three times in 2008, 2011, and in 2015. Otherwise, they have ended higher in every other year during this period.

On the face of it, things appear to be in favour of bulls in 2024 as well. Many see the BJP’s massive win in the recent state elections as a precursor to a convincing victory in May 2024 general elections as well. That augurs well for the continuity of government policy.

In addition, the Fed has signalled that it will cut the benchmark interest rates in 2024, and many market participants see that happening as early as in March. Should Fed cut rates, it would prompt a similar move from the RBI as well. Economists say the reason the RBI has not cut the rates so far is that doing it ahead of a similar decision by the Fed could put pressure on the rupee.

But some market experts say investors would be better off partially booking profits in stocks, particularly smallcaps and midcaps, where they have made outsized gains.

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"The year 2024 will be interesting as developed economies are likely to slow down, but challenges of rate hikes are unlikely. The year could see the Federal Reserve cutting the interest rates by mid-year, which will help the equity market. However, elections in India and in the US are likely to stoke volatility, which means reduced market breadth and focus shifting to liquidity and quality management within the portfolio," said Naveen Kulkarni, chief investment officer at Axis Securities PMS.

Analysts also foresee India's strong economic performance extending into 2024 due to its sizable market, youthful workforce, and dedicated focus on reforms in education, upskilling, tech-driven governance, infrastructure, and enhanced regional connectivity.

India's pricey equity market valuations might persist, bolstered by the prospect of a stable central government. Moreover, as foreign portfolio investment (FPI) holdings hit a decade low and potential foreign interest looms in the debt market before India joins the JP Morgan Emerging Market Government Bond Index, it could offer stability to the rupee (INR), according to analysts at Kotak Alternate Asset Managers.

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"While it seems that the market has priced in most of these near-term positives, we expect Nifty to return high single-digit gains in 2024. Risk-reward ratios favour large-caps over midcaps and smallcaps, and PSUs still have the potential for outperformance. We remain constructive on banks, select NBFCs, real estate, and pharma. Investors with a long-term horizon can start accumulating chemicals and IT stocks on dips", said Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers.

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