It’s a new year and there are new hopes. Will 2024 deliver new highs to the Indian stock markets? Towards the end of December, key benchmark indices, the Nifty50 and S&P BSE Sensex, climbed new peaks. This was driven by positive domestic and global news flow.
First, the Reserve Bank of India raised its FY2024 gross domestic product growth forecast to 7% from 6.5% after September quarter (Q2FY24) growth came in better than expected. Anticipation of interest rate hikes by the US Federal Reserve also fueled sentiment. As such, liquidity inflow from both domestic and foreign institutional investors into Indian stocks has been robust.
Amidst the flowing optimism, the fear gauge that is the NSE volatility index (VIX) has risen by 35% in the previous six months. Theoretically, the movements in VIX and benchmark indices are inversely related. Simply put, this means that the Street is currently fixated on positives, turning its eye to potential threats.
This is despite India’s expensive valuations. The MSCI India index is trading at a one-year forward multiple of nearly 22 times, a striking premium to the MSCI Asia Ex-Japan and MSCI EM Index, Bloomberg data shows, thus leaving no room for disappointment. Particular hotspots are expensive Indian mid-cap and small-cap stocks, which have beaten large caps in droves in 2023.
Another positive factor was the result of recent state elections in favor of the Bharatiya Janata Party, which runs the union government. It calmed investors’ concerns about political and administrative uncertainty as the market heads into this year’s general election, likely in April or May. But despite increased investor confidence in continued political stability, predicting the outcome of the general elections is difficult.
“An analysis of the past five general elections (which are more relevant as the incumbent governments have served full 5-year terms), indicates that markets are approaching the elections with optimism. Nifty index rose an average of 13% over the 6-month period before the choices,” Standard Chartered said in a report.
This can be attributed to picking up pre-election spending and populist measures, both of which are positive for consumer demand. Although, unless the actual event of the 2024 general election is out, a potential event risk remains. “History shows that election results can be unpredictable as sentiments can swing during the campaign season,” Standard Chartered said.
In 2024, the United States is also scheduled to have its general election, the outcome of which tends to have global economic consequences. Despite the global liquidity scenario becoming supportive, an unexpected outcome could be a dampener. In addition, geopolitical conflicts are not completely out of the way.
Chinese economic growth may also disappoint. “China is slowing down. This can be a double-edged sword for other developing countries. While on the one hand, countries like India gain from a China+1 strategy, a slowdown in any major economy has an additional negative impact on the rest of the world,” BOB Capital Markets said in a report.
Back home, the trajectory of corporate income growth and revival of rural demand are key to the consumption theme. Analysts, however, believe that election-related developments may overshadow India Inc’s Q4FY24 and Q1FY25 performances. Further, a steep resurgence of Covid cases leading to limited economic activity would be undesirable.
“In our view, it would be best to enter 2024 with low return expectations from the market,” Kotak Institutional Equities said in a December 27 report. The trading firm warns that the market can conveniently ignore the fact that valuations of most stocks are. well above their pre-pandemic levels, while interest rates are likely to be higher against pre-pandemic levels even after possible rate cuts in 2024-25.