2023 was a great year for equity investors in India, with the Nifty Index ending up over 20%. This was the eighth consecutive calendar year of positive returns, the longest streak ever in Nifty’s recorded history since 1996. The broader markets did even better, with the Midcap and Smallcap Index up ~47% and ~56%, respectively. The key question for investors is whether this rally will be sustained in 2024 and how one should position their equity allocations.

Sailing through with the growth optimism  

The macroeconomic environment would be a key factor in determining one’s equity investment strategy for 2024. We believe domestic growth in H1 2024 is likely to stay strong from an acceleration in consumption demand through election-related spending. Investment growth could pick up in H2 2024 as the new government’s policy priorities become apparent, driving an acceleration in private spending. In addition, India is relatively less exposed to global macro risks given its large domestic growth base and improving external position. On inflation, the outlook has improved compared to the past year. Though a surge in oil prices and weather-related uncertainty can create inflation risks, the ensuing disinflationary momentum in core inflation (inflation ex-energy and food), and the government’s readiness to intervene on the supply side will likely contain its impact. In our assessment, the above growth-inflation dynamics will enable the RBI to cut rates in the latter half of 2024 as disinflationary pressures build through the year.

Overweight Equities

Against the above macro backdrop, we believe investors would need to find attractive risk/reward opportunities, and we believe equities are where we expect the positive momentum to extend in H1 2024, driven by the following factors

1.    Superior profit cycle: India’s earnings cycle has stayed resilient after a decade-long down-cycle from 2011-2020 (Nifty Index EPS CAGR of ~4%). As per Bloomberg consensus estimates, Nifty index EPS is expected to grow ~15% over the next two years, taking EPS growth to ~18 between FY2020 and 2025. This would make the current earnings cycle the best since 2004-08 .  

2.    Valuations appear more reasonable: India’s market capitalisation crossed the USD ~4trn mark in 2023 as domestic equity indices scaled new all-time peaks. However, the Nifty Index’s 12-month forward P/E ratio is at ~20x, lower than the 2021 peak of 23x, given strong earnings delivery. In our view, Indian equity’s valuation premium to peers is justified by the continuance of its superior GDP growth and earnings delivery outlook.

3.    Low foreign investor positioning and strong domestic flows: Despite strong foreign investor inflows in 2023 (USD 21bn), foreign ownership of the BSE 200 index market is close to decadal lows of ~18%. Domestic flows remain strong on greater adoption of financial assets and robust systematic investment inflows in mutual funds.

4.    Pre-election optimism: A historical analysis of the past 5 General elections ( more relevant given that incumbent governments have served full 5-year terms), indicates that markets approach the elections optimistically. The Nifty index rose an average of 13% over the 6 months leading up to the elections on a pick-up in pre-election spending. Further, post-election performance data indicates that markets react strongly to surprise polling outcomes – a sharp correction in 2004 on the loss of NDA and a strong rally as observed in 2009 and 2014 on larger-than-consensus verdicts.

Positioning within equities

Our key overweight within equities is large-cap equities, which are given a better margin of safety in earnings and valuations than mid-cap and small-cap equities and stronger balance sheets to cushion from emanating risks.

Our preference for value-style equities and investment sectors over the past two years has resulted in outsized gains. We continue to see value in both in 2024. Value equities are likely to benefit from the ensuing cyclical growth momentum, still elevated bond yields and cheap valuations (MSCI Value index P/E at 16x vs MSCI India PE of 20x and MSCI India Growth index PE of 29x). Manufacturing and infrastructure are supported by multi-year structural drivers like improvement in capacity utilisation, the government’s continued thrust on capex, strong corporate sector balance sheet and the government’s past policy initiatives to boost domestic manufacturing capability. Within equity sectors, we prefer a barbell approach through an overweight on domestic cyclicals (Industrials and Consumer Discretionary) and a defensive overlay via an overweight on healthcare.

Stay Nimble 

A relatively positive equity view does not take away from the importance of being nimble if conditions change. Our equity constructive view may be at risk if the economic growth or earnings delivery faulters, either for domestic reasons or a hard landing scenario in major developed economies. Geopolitics is one potential risk, especially given that 2024 is likely to experience an unusually busy election calendar. As market consensus leans towards continuity in government in the upcoming General Elections in India, a surprise outcome could trigger market volatility in the near term. Finally, history shows us that something ‘breaks’ when rates are high. We would remain on watch for potential policy missteps of being too hawkish or too dovish.

The writers are Head , Wealth Management, Standard Chartered Bank and Head, Investment Products and Strategy, Standard Chartered Wealth, India

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