Wave Of Positivity Ahead
It has been a great year for stock markets around the world, with the S&P 500 delivering 20 per cent returns, Dow Jones at an all-time high, and even Japan touching its highest levels since 1989. The benchmark Sensex surged past 70,000 levels for the first time in early trade on December 11, with 70 per cent of the last 10,000 points taking just 31 days to reach. On December 10, the Nifty 50 tested the 21,000-mark.
As per data by the International Monetary Fund (IMF), the global inflation levels are expected to cool down to 6.9 per cent from 8.7 per cent in the previous year. This cooling of inflation has raised expectations about a pause in rate hikes followed by rate cuts by 2024 end.
While central banks across the world may consider pausing rate hikes and even resort to rate cuts in the latter part of 2024, there is certainly no going back to the lows that followed 2008-2009. A recent report by Vanguard stated that for the next decade, the US stock markets could return to their 4.2 per cent - 6.2 per cent range and they are forecasting stronger potential returns from the emerging markets.
The Indian economy has been very resilient in the last couple of years despite the growing challenges faced by the world. The 7.6 per cent print for GDP growth reported for the last quarter has only reinforced the fact that India should be the fastest-growing large economy in the world for the next few years. The strong win for the ruling party in the just-concluded state elections has also added to the growing positive sentiments which further caused the spurt in the markets.
We began 2023 with apprehensions including the possibility of the continued rise in inflation, rising risk aversion and a recession in developed economies. But in most of the cases we witnessed, it transpired favourably than anticipated. The Indian equity market rebounded strongly in 2023, reaching several new highs, including one in the recent past, following a lacklustre initial quarter. The midcap and small cap indices exhibited exceptional performance throughout 2023.
In contrast, market sentiments are considerably more optimistic as we enter 2024. The consensus anticipates a continuation of softer inflation, gradual but early cuts in monetary policy rates in the major industrialised countries, and the absence of at least an annual recession in both the US and Europe.
A number of these may not materialise in practice. Rapid monetary tightening initiated in 2022 may have a significantly greater adverse effect on growth than is presently estimated. As a result of the inflationary surge that occurred in 2022, the major central banks might be considerably more reticent about reducing interest rates during the current cycle. Recessions in the euro area and the US continue to be distinct possibilities. These setbacks, in conjunction with the current overvalued state of the US equity market, indicate that a significant market correction in the United States is probable in 2024. Historically, Indian equity markets have outperformed their counterparts across all medium to long-term investment periods.
Risk & Challenges
One of the key risks that we are looking at is exposure to significant global risks, such as recession in developed nations, a more gradual relaxation of monetary policy rates than anticipated, and the potential for corrections in the US equity market. Moreover, the Indian equity market is confronted with substantial risks due to excessive fiscal deficits and public debt levels in the US, higher-than-anticipated unemployment rates in developed nations, ongoing geopolitical uncertainties, and US elections. Key risk factors for the Indian equity market on the domestic front include a deceleration in corporate investment and populist declarations by political parties in anticipation of the upcoming general elections, as well as a deceleration in private consumption as indicated by recently released GDP data.
The sustained substantial inflows into the Indian equity market, particularly from domestic investors, and the public's interest in primary equity capital raises (especially IPOs) by companies appear to indicate that investors maintain a positive outlook regarding the Indian equity markets.
We do not observe any substantial overvaluation of mid-cap or small-cap equities relative to their historical averages, at least at the index level. On the contrary, over the last two years, the performance of large-cap indices has been lacklustre, yielding returns in the single digits, which are below historical averages.
India maintains the highest macroeconomic performance among its peers and continues to be one of the most captivating nations in the emerging market space. Despite concerns regarding a deceleration in consumer demand and a lacklustre demand for India's exports of goods, we anticipate India's GDP to expand by approximately 6.5 per cent in the current and following fiscal years, we expect Indian equities to maintain the upward journey in the near term and are positive on the long term.
