Vijay Kumar Gaba

1.  Macroeconomic environment
2.  Global markets and flows
3.  Technical positioning
4.  Corporate earnings and valuations
5.  Return profile and prospects for alternative assets like gold, real estate, fixed income etc.
6.  Greed and fear equilibrium
7.  Perception of the political establishment

The outlook for these seven factors for the next twelve months is as follows, in my view—

Macroeconomic environment – Neutral

My outlook for the likely macroeconomic environment in 2024 is as follows:

(a)        Inflation: Consumer inflation may average well within the RBI tolerance band of 4% to 6%. However, food inflation may continue to be erratic and cause occasional violations of the upper range.

(b)        Fiscal Deficit: The fiscal situation of the central government may remain comfortable as the tax collections remain steady and revenue expenditure is controlled further. I do not expect any significant deterioration in fiscal conditions due to elections scheduled in 2024. No major tax/duty concessions are expected. Any major improvement in fiscal balance would depend on acceleration in asset monetization. The outcome of the general election will be a key factor in this regard.

(c)        Rates: Expect benchmark yields to average in the 7.00% +/- 30bps range. The RBI may remain on pause in the first half and may deliver a 35-50bps cut in the second half depending upon the monsoon and global trend. No major change may be seen in deposit and lending rates as the liquidity remains tight and credit demand remains elevated.

(d)        Current Account: Expect the current account balance to stay negative for most part of the year as import growth continues to outpace exports. The deficit may average around 1.5% to 1.75% for2024.

(e)        Savings: Household savings may grow at an even slower pace as real wage growth remains poor. Aggregate corporate savings may also decline as capacity utilization increases and corporates embark on capex plans.

(f)         Investment: The government investment expenditure may slow down in 1H2024 due to fiscal constraints and election-related restrictions. Private capex may maintain its 2H2023 trajectory. Overall, investment growth may see decent growth in 2024.

(g)        Exchange Rate: USDINR may average close to INR83.5 +/- 1 range on a negative current account and elevated inflation.

(h)        Growth: The real GDP growth for FY25 may average around 6.25% +/- 50bps despite a slower global economy. Strengthening of El Nino and a poor monsoon could impact the growth negatively by 50-60bps.

Overall, the macroeconomic outlook is neutral.

Global markets and flows - Neutral

Markets: The global analysts and economists are nearly unanimous on the growth recession in 2024. Most markets are currently pricing sharp rate cuts and monetary easing to mitigate the impact of economic slowdown. Any disappointment on this count may impact global markets adversely.

Flows: The outlook for USD is now negative as Fed is expected to deliver aggressive rate cuts. Flows towards emerging markets may accelerate in 2024 as cheaper money in developed market begins to chase yield again.

Technical Positioning - Negative

In my view, the benchmark indices are poised for a decent technical correction. and offer a negative risk-reward at the current level. A correction of 8-10% would make the market attractive again.

Technically speaking, Nifty may move in a wider range of 17390-23063 in 2024, averaging above 18880. Buying below 19400 will carry a positive risk reward.

Corporate earnings and valuations - Neutral

The earnings momentum may slow marginally as banks, energy and metal earnings growth peaks in FY25. No major acceleration in earnings is expected from FMCG companies. Power, IT Services, and Pharma are the notable sectors that are expected to delta in earnings. Overall, expect a 15% earnings growth, which may be lower than the current consensus expectation.

The visibility of the improved margins sustaining is decent. Higher capacity utilization may warrant capex, hence the beginning of a re-leveraging cycle from FY25. RoE therefore may not improve materially in next couple of years.

The present forward valuations are marginally higher than the long-term averages based on still marginally optimistic earnings forecasts.

Alternative return profile - Neutral

Real estate: Real estate prices may not rise materially in 2024 as higher interest rates, withdrawal of tax incentives, and slowdown in demand due to slower employment growth may weigh on demand.

Gold: The gold prices have recently rallied on the back of expectations of aggressive rate cuts by central bankers and persistent buying by some large central banks. A weaker USD may further support gold prices in 2024. However, there is little to suggest any major rise in the global gold prices. Save for a major geopolitical escalation, gold offers a neutral to marginally negative risk reward from the present level.

Cryptocurrencies: In the past few years, Cryptocurrencies have emerged as a notable alternative asset class. Being a new asset class the level of understanding and awareness about this asset class is still low, though the participation has risen exponentially. This combination of low understanding - high participation makes it highly volatile. Nonetheless, its popularity remains high and this trend may continue in 2024 as well.

Fixed income: The corporate bond yields and deposit rates may see some downward bias in 2024, as policy rates peak and begin to descend. The yield gap that favors bonds presently may be sustained for most part of 2024.

Overall, in my view, the return profile of alternatives is neutral for equities.

Greed and fear index - Negative

Historically, the most successful, though intuitive, indicator of greed overtaking the fear in the stock market is the outperformance of small-cap stocks over large-cap stocks. The volatility index, another gauge of fear, has however inched higher in the recent weeks.

The sharp outperformance of smallcap stocks in 2023 indicates that greed dominates the sentiments presently. This sentiment may change in 2024 when the global news flow becomes ominous. The Greed and Fear balance therefore is unfavorable presently.

Perception about the political establishment - Positive

Strong commitment to promote manufacturing in India; the positive outcome of thrust on self-reliance, controlled fiscal balance, and recent election victories are keeping markets’ perception about the political establishment positive. A strong performance in the general elections may further strengthen the positive perception.

Outlook for Indian markets

Given the positioning of the above seven key factors, my outlook for the market in 2024 is as follows:

(a)        Nifty 50 may move in a large range of 17390-23063 during 2024. It would be reasonable to expect a high single-digit return for the year on diversified equity portfolios.

(b)        The outlook is positive for Non-bank financials, Fossil fuels, Construction materials, Capital goods, Infrastructure, Technology, Pharma, and Modern retail. Outlook for automobile is neutral. Large-cap stocks may outperform. Closely watch chemical space for the revival of fortunes.

(c)        Benchmark bond yields may average 7.00% +/- 30bps for the year. Shorter end yields may continue to do better in 1H2024, while longer duration may do better in 2H2024.

(d)        USDINR may average close to 83.5+/- 1 and move in the 81-85/USD range.

(e)        Residential real estate prices may appreciate marginally and remain generally remain stable. Commercial real estate may continue to perform better.

Some key risks to be monitored for the market in 2024

1. Development of El Nino adversely impacting monsoon; and unusual rise in rural stress.
2. Worsening geopolitical situation in Europe and Asia.
3. A large credit event causing market freeze.
4. A deeper than expected recession in developed economies that may spill into 2025 as well.
5. Sharp rise in commodity prices due to production/logistic disruptions; restocking; displacement of USD etc.
6. General election results contrary to expectations. 

2024: Investment Strategy

Asset allocation

2024 may be a challenging year for investors. The volatility and uncertainty may increase materially requiring investors to focus on capital preservation while attempting to generate reasonable returns. At the same time, the market may offer attractive opportunities to build a good portfolio for the period beyond 2024.

I shall maintain a standard allocation in 1H2024 and engage in active trading in my equity and debt portfolio to optimize return using the benefit of large swings. However, in 2H2024 I would look for opportunities in the emerging themes for the next decade and build a long-term portfolio. Maximizing return will not be my primary focus in 2024.

My target return for the overall financial asset portfolio for FY24 would be 11%.

Equity investment strategy

I would maintain 60:20:20 mix of large, midcap and smallcap stocks.

(a)        Target 9% price appreciation from my core equity portfolio and 18% earning from my trading portfolio;

(b)        I shall be overweight on Non-bank financials, Fossil fuels, Construction materials, Capital goods, Infrastructure, Technology, Pharma, and Modern retail.

(c)        I will avoid popular themes like defense and clean energy.

Miscellaneous

I have assumed a relatively stable INR (Average around INR83/USD) and slightly lower short-term rates in investment decisions. Any change in these assumptions may lead to a change in the strategy midway.

I would continue to avoid directly investing in high-valuation new economy businesses like digital platforms and Fintech. I will also avoid international equities and gold.

Also read

2023: The year that was

2023: What worked and what did not

2024: A new paradigm unfolding

2024: Trends to watch

Next

2024: What the experts are saying