Do it yourself: 2024

Showing posts with label 2024. Show all posts

Tuesday, December 24, 2024

Greed consistently dominated fear in 2024, or did it?

The sentiments of greed (risk-taking) and fear (risk-aversion) are two key factors that determine the breadth and depth of the stock market performance over a short term.

In the risk-averse phase usually themes like large cap, defensive, value, dividend yield, etc. lead the market performance. In this scenario, the market breadth is usually narrow; fewer companies raise fresh capital; volatility is low; and market breadth is consistently poor.

On the other hand, in the risk-taking phase, themes like small and midcap, growth, cyclicals, etc. lead the market performance. In an environment supporting risk-taking, usually the market breadth is strong, volumes are above average, and volatility is higher. The primary market is very active in this phase, as a larger number of entrepreneurs look to raise fresh capital for growth and deleveraging.

The year 2024, however, has seen some divergent trends. Several contradictions prevailed, which not only raise doubts about the validity of the current risk-taking phase in the conventional sense, but also present a higher probability of emergence of a severe risk-aversion phase in the near term. For example, consider the following:

· Small and midcap stocks consistently outperformed the benchmark Nifty throughout the year, despite several risk affecting events like BJP not securing majority in the general elections in India; serious escalation in the Middle East Asia geopolitics; outcome of presidential elections in the US threatening a full-scale tariff war; growth slowing materially in Europe, China and India; sticky inflation restricting global easing cycle; corporate earnings failing to meet expectations etc.

· The promoters raised over Rs three trillion through initial public offerings (IPO), qualified institutional placements (QIP), and rights issues. However, most of the QIP and rights issue money was used to deleverage the balance sheets rather than expanding capacities – usually a sign of risk-aversion. Even many of the IPOs were 'offer for sale', where the promoters diluted their stakes.

· Foreign portfolio investors have been net sellers in Indian equities in the year 2024. In the secondary market, FPIs sold over INR 1.1 trillion worth of equities in 2024. However, they bought almost a similar amount in the primary market. The share of the Indian listed market capitalization owned by FPIs fell to ~16%, the lowest level in a decade. The domestic institutional investors however purchased over INR 5.1 trillion worth of equities in the secondary market. The share of the market capitalization owned by the household investors increased to the highest level in the past 15 years.

Historically, the correlation of FPIs’ net flows and Nifty returns in a given year has been poor; but the rise of household share in stock ownership has mostly led to a risk-aversion phase in the markets.

· Despite significant outperformance of the small and midcap stocks, the market breadth and overall traded quantity has not been supportive of a risk-taking trend. In the 6 out of first 11 months of 2024, market breadth has been negative. Overall, the market breadth is neutral. The traded quantity has been mostly below average in the last six months.

· The implied volatility has been mostly moderate to low, except for a brief spike in May 2024 (election month), usually not a sign of a risk-taking phase.

Wednesday, December 27, 2023

2024: Trends to watch

The first day of January of the Gregorian calendar is widely celebrated as “New Year” globally. Scientifically speaking, this is just another point in ad infinitum; and no different from the millions of other similar points in the history of mankind. Nonetheless, we celebrate it as a new beginning, after every twelve Gregorian calendar months. The idea perhaps is to take a break from the routine and reflect on events of the past twelve months to review, reassess, revise, retreat a bit if required, and resume. It is common for people to take a pledge on this occasion, to take corrective measures for improving their lifestyles and behavior, and to set new goals for themselves.

In the financial markets also, it is a tradition to use this occasion to reflect on the market behavior during the past twelve months, outline the events to be watched over the next twelve months, and make an assessment about what may work best for investors and what may not.

Following the tradition, I have also reviewed the current conditions and shortlisted the following factors and trends to watch over the next twelve months. I believe that these factors and trends, inter alia, may materially impact the markets in the next twelve months and beyond.

Interest rates

At this point, it is a common belief that the current interest rate cycle that started in the Spring of 2022 has peaked in 2023, and we shall see a decline in rates during 2024. However, the views diverge about the trajectory of rate decline. A strong view is that to avert a recession, central banks may resort to accelerated rate cuts in 2024 and 2025. Other views include a calibrated rate-cut policy; a slow start in 2024 and rates bottoming much above the lows seen during the previous couple of cycles. A minority view is that consensus may be wrong about the rate trajectory and we may see higher rates for much longer than what the majority believes presently.

Investors would need to watch the trend in interest rates closely during 2024. An accelerated rate cut may mean (i) massive money flowing back to bonds; (ii) massive short covering in bond markets; (iii) USD strengthening; (iv) growth reviving in developed markets and (v) carry trade coming back in vogue as smart money travels to emerging markets in search of higher yields.

Disinflation vs deflation

2023 has seen significant disinflation in most developed and emerging economies. Most central bankers have either achieved or are closer to achieving their inflation targets. Global growth, especially in advanced economies, commodity-dominated emerging economies, and China has taken a hit.

Presently, many European economies are struggling with stagflation. Japan is witnessing positive real rates after a decade. US COVID stimulus has faded, leaving consumers vulnerable. Higher positive rates are impacting discretionary consumption and investment in many other economies.

It is to be watched whether the current trend stops with disinflation or pushes the major economies to a state of deflation. Particularly, since the strong deflationary forces like the use of artificial intelligence to replace semi-skilled and skilled workforce; aging demographics, dematerialization of trade and commerce, etc. continue to gain strength.

In case deflationary forces gain material ground, we may see the policymakers loosening money policy to recalibrate controlled inflation. This will see the Japanification of major economies like China, the US, and the EU. Emerging markets and independent currencies (e.g., Bitcoins) could be major beneficiaries in such a case.

Impact of AI

We are ending 2023 with companies like Google and PayTM announcing a material reduction in jobs as they replace workers with AI tools. This trend is likely to accelerate in 2024. It is critical to watch how businesses, households, and governments adapt to this trend.

The transition will indubitably be challenging as the redundancy of workforce and businesses increases. We may also witness a serious rise in the cases of cyber crimes and proxy wars. Plenty of regulatory frameworks would need to be recalibrated to meet the challenge. This process may also disrupt the businesses.

On the other hand, many businesses might experience tremendous productivity gains and a rise in profitability.

Geopolitical challenges

As we draw curtains to the year 2023, the world faces multiple geopolitical challenges. It is likely that in 2024-

(i) NATO may decide to end (or materially diminish) support to Ukraine, forcing a truce at Russian terms leading to end of sanctions on Russia and strengthening President Putin.

(ii) Arabs, aided by China, Iran and Russia, striking Israel in a proxy war against the US in a critical election year.

(iii) China entering Taiwan

(iv) Conflicts at Northern and North Eastern Indian borders as both India and Pakistan elect their new governments.

Global asset allocation rebalancing

The direction of the Indian markets could be significantly influenced by the global asset rebalancing in light of the change in interest rate trajectory, movement in USD and JPY, geopolitical tensions, disinflation/deflation etc.

The money managers might change their allocation strategies for EM vs DM, Equity vs Debt, China vs Japan, Physical Assets vs Financial Assets, Gold vs Bitcoin etc.

Presently the consensus is favoring accelerated rate cuts. Equity valuations and allocations (value vs growth) are congruent to this view. The margin for error therefore is low.

India’s growth sustaining the momentum

In 2023, the Indian economy surpassed the expectations of most agencies including the RBI and IMF. However, some key drivers of the above expectation growth appear tired.

· Private consumption growth continues to lag, while the fiscal constraints are now visible on government consumption expenditure.

· Poor global growth is likely to reflect on the exports and remittances in 2024, exacerbating the pressure on current account and INR.

· The erratic weather conditions may continue to challenge rural productivity and demand.

· Private investment has shown decent signs of recovery in 2023. Higher positive real rates may adversely impact this trend.

· The general elections scheduled in March-April, may also delay some public and private investment decisions.

· Bank asset quality improvement appears to have peaked in 3QFY24. The RBI has repeatedly cautioned about rising stress in unsecured consumer loans. A significant rise in service sector layoff might adversely impact home and vehicle loans also. Though, the probability of any significant deterioration in bank asset quality in 2024 is negligible, the growth and margins may certainly be impacted. This might limit the credit growth and hence the growth momentum.

Thursday, December 21, 2023

2024: A new paradigm unfolding

From the events of the past few years, it is evident that the era of peace and global cooperation, which started in the aftermath of two devastating wars in the first half of the twentieth century and flourished after the end of the Cold War in the late 1980s, may be coming to an end.

In my view, the year 2024 will see a new paradigm unfolding in global economic, political, and geopolitical spheres. The new paradigm which would take a couple of decades to manifest fully, may inter alia see multiple axes and alliances emerging in the global order, competing with each other for supremacy. Consequently-

· Global trade may get fragmented into multiple trade blocs.

· A new monetary order may emerge that may include separate invoicing currencies for trades within different blocks and a couple of independent currencies for broader international trade. Unsustainable debt of the developed economies could be redeemed in unconventional ways, e.g., currency devaluation, partial write offs, mandatory roll over till perpetuity,

· The trend in the financialization of economies may reverse. Physical resource ownership and localized manufacturing may become the primary focus again.

· National boundaries may get redrawn or obliterated due to (i) territorial occupations to gain control of natural resources and enhance geopolitical influence; (ii) more alliances like the European Union, and (iii) voluntary consolidation like Germany.

· The incidence of war and hostilities may rise.

· Nationalism might triumph over globalization. Post WW2 global institutions and agreements like the UN, IMF, WTO etc., may become redundant. Migration of labour and sharing of knowledge may suffer badly.

· Global aid to poor countries which were exploited by the imperial colonists during the 18^th to 20^th centuries, may diminish substantially, unleashing a new era of starvation and disease.

· Global demography may see material change. The average life span in developed and larger developing economies may rise due to medical advancements, while the population may continue to decline.

· Population in poor countries may decline due to starvation and disease. There may be more incidences of pandemics originating from poor countries, especially in Africa.

· Technology apartheid could emerge as the most dangerous trend over the next decade.

· “Artificial intelligence” (AI) may become the new equivalent of the 1940s atom bomb. The technological advancements in generative AI may seek to supplement the declining demographics and present huge productivity enhancement potential. However, the rise of authoritarian regimes and hyper-nationalistic tendencies creates the potential for misuse; raising the specter of a potential repeat of the Hiroshima-Nagasaki type disaster.

These changes will of course create once-in-a-generation investment opportunities; though with materially enhanced risk.