Raising the guards

The year 2024 started with the fervor of Ram Bhakti. The stock market made a new high in mid-January. Investors felt that the grand opening of Ram temple in Ayodhya will stimulate economic activity and provide a material impetus to economic growth. However, the stock market could not hold gains and ended the month of January almost unchanged.

The interim budget in February was mostly a non-event, and markets ended the month only with marginal gains. Announcement of elections and early indications of a larger majority for the incumbent BJP took the markets to new highs in March. However, the markets remained circumspect about the election outcome. Below expectation results for 4QFY24 also did not help the markets. For three months (March-May), the Nifty50 gained ~2.5%. After the announcement of the election results, the Nifty50 has gained another ~3.5% from April closing level. Overall, the Nifty50 is up by ~7.5% YTD2024. The Bank Nifty has underperformed the benchmark Nifty50 and is higher by ~3.4% YTD2024.

The broader markets have performed much better. Nifty500 (+13%), Nifty Smallcap 100 (+16.5%), Nifty Midcap100 (+16.6%) have beaten the Nifty50 returns by a wide margin. Most professional analysts are forecasting a high-single-digit to low-double-digit return from the Nifty50 this year. This implies that the upside for Nifty might be limited from the current levels.

However, the momentum in the market is strong and domestic flows continue to remain buoyant. The progress of the monsoon so far is encouraging. The formation of a new government augurs well for continuity and stability. A combination of all these factors might take the markets much higher in the next few weeks.

I certainly do not want to be a party pooper. After all, who does not like to make some quick bucks!! Nonetheless, it would not be completely undesirable to raise the guards a little higher.

I agree that on an aggregate basis, the market does not appear anywhere closer to the bubble territory. However, there are numerous stocks that may have already crossed over to the red zone. Controlling the urge to run after fast running trains and avoiding FOMO is critical under these circumstances. It may sound cliché, but stock selection indeed is very important.

There are some scattered dark clouds on the horizon that may spoil the party. It is important to keep a watch and take out umbrellas in time, should the clouds gather and advance towards Indian markets. In particular the following six events could potentially impact the market sentiments in the next six months.

·         The final Union Budget for FY25 not meeting investors’ expectations.

·         FY25 earnings failing to meet the elevated expectations.

·         The temporal and Spatial distribution monsoon becomes erratic causing floods in many areas and drought in some areas.

·         Key state assembly elections later this year going against BJP and destabilizing the central government.

·         Xi Jin ping trying a misadventure in Taiwan, as the home situation continues to improve.

·         RW hardliners gaining full control of Europe after significant victory in the EU Parliament.

·         Triumph of Trump in November presidential elections threatening large scale geopolitical and economic disruptions.