Market mavens expect a mega bull run in 2024 as risks fade, large caps & cyclicals to drive rally

• Most equity strategists expect Indian equities to enter a phase of a classic bull market in 2024.
• Improving macros like terms of trade, flexible inflation targeting, and stable non-portfolio foreign flows have created a conducive environment for a secular bull run.
• Nifty likely to return 15% in calendar 2024. Rally in large caps to be driven by cyclicals and growth stocks. Defensives and IT may remain in a funk in the new year too.
  

The last two years have been volatile for equities, primarily because of rise in geopolitical tensions and Federal Reserve’s aggressive rate hike cycle. Not surprising then that the foreign portfolio ownership of Indian stocks has dropped to a decadal low. So if the last two years have been about “risk off” trades, the year 2024 could mark the return of equities. Strategists have been advising buyers to stock up on large caps because they are expecting foreign investors to return in droves.

Most equity strategists expect Indian equities to enter a phase of a classic bull market in 2024. When that happens investors will need to focus on risk management and must be guided by the principle – a rising tide lifts all boats. With the greatest risk to the market fading, all boats during the approaching bull market will rise. According to ICICI Securities, the real skill would be to focus analytical efforts towards finding ‘what not to buy’. Strategists expect defensives and IT stocks to remain in a funk. While defensives are stuck in high valuation and slow growth stage, IT services may not see revenues pick up as developed economies continue to see slower growth.

BoFA Securities is expecting Nifty50 to hit 23,000 in 2024, despite its conservative earnings forecast at 12% CAGR over FY23-26 against consensus estimates of 15%. The global investment bank sees risks emanating from slower global growth. This is despite Nifty meeting/beating consensus earnings in FY22/23 & strong first half of FY24.

“We see risks skewed in favor of Nifty: expect CY24 returns at -6% (worst case) to +23% (best case). Our base case is Nifty at 23000 (15% returns). We expect valuations to expand on potential of improving geopolitics & continued reforms and revival in FII flows vs $182bn/$10bn EMs/India outflows during Fed hike cycle leading to FIIs’ India equity ownership & overweight positioning within emerging markets at multi-year lows,” BoFA Securities says in its report on outlook for 2024.

Market experts are unanimous in their stock recommendations for next year. Given that large caps have severely underperformed the mid and small cap stocks, the market rally in the New Year could well be driven by mega caps and large caps. Like the rest of the year, in November too the Nifty underperformed with +5.5% gain, but the Mid-cap and the Small-cap indices outperformed with +9.6% and +10.2% returns, respectively. Clearly, the large caps will have to catch up in 2024.

BoFA prefers domestic cyclicals, growth stocks and large caps. Its overweight skew is for financials (best risk-reward, low FII positioning), industrials/cement (multi- year capex upcycle), staples (low inflation, likely rural stimulus). It remains underweight on IT (tepid growth/visibility), utilities (potential execution delays), telecom (delayed price hikes), energy (higher crude), metals (potential price cuts), healthcare (lacks catalysts).

Vinod Karki of ICICI Securities also echoes a similar sentiment. The brokerage expects cyclical factors to accelerate in CY24 driven by capex-cycle firing on all cylinders, thereby triggering the corporate re-leveraging cycle. Corporate profit of listed companies is expected to touch 5% of GDP with return on equities moving into value-creating zone of >15%.

The greatest risk that the market was factoring in was political instability and a possible change in government at the Centre in 2024. With Bharatiya Janata Party storming the Hindi heartland with a clear majority, that risk appears distant now. The other uncertainty has been around further interest rate hikes but ICICI Securities does not expect any major shocks as per the trends so far.

Morgan Stanley expects India's stock market to remain in positive territory in 2024 too. In its outlook report for the New Year, MS says the market is likely to price in continuity and a majority government, leading to a rise in equities. Several factors contribute to this positive outlook, including strong macro stability, forecasted earnings growth, and a reliable source of domestic risk capital.

One of the key factors supporting the positive outlook is India's strong macro stability, says the global investment bank. The country has seen improvements in terms of trade, flexible inflation targeting, and stable non-portfolio foreign flows. These factors have led to a reduction in correlations and volatility of Indian stocks relative to emerging markets (EM). India's beta to EM is less than 0.4, indicating lower volatility. Additionally, India's rate spread with the US has declined, further supporting the positive outlook.

Courtesy: Bank of America

The MSCI World, the MSCI EM and the MSCI Asia ex-Japan indices soared 9.2%, 7.8% and 6.9% respectively in November. Jitendra Gohil, Chief Investment Strategist, Kotak Alternate Asset Managers highlights that the risk on sentiment was boosted by easing fears of Fed rate hike. He says, “Easing fears of interest rate hikes by the Fed, a dovish Bank of Japan, easing inflationary pressures and a touch of bargain buying were the key drivers of global stock rally in November.