In a report, CLSA noted that Indian equities began 2024 amid extreme bullish sentiment, with top-decile valuations and a record discount to debt yields. Despite India’s exciting long-term growth history and the prospect of a third term for the current government at the Centre, this strained starting point may weigh on performance this year.
“At 20.2x, Nifty’s Price-to-Earnings (P/E) has been higher only 8% of days over the past 18 years. The market’s valuation premium to its historical average is the highest recorded among the 19 most large global markets, but it is no longer the EPS growth leader it has been for the past three years,” CLSA analyst Vikash Kumar Jain said.
Read also: MSCI EM Index: India rises to second place; weight is likely to cross 20% by mid-2024
CLSA believes that Nifty is trading at earnings multiples that have historically led to reversals.
“India is now the most expensive of the world’s largest markets and the only one trading in the top decile of its historical trading range. In fact, 15 of the top 19 global markets are trading below their historical average valuations. This shows how stretched Indian valuations are in relative terms; it also highlights the likelihood that any story or earnings growth disappointments could trigger a correction,” a CLSA report said.
Any improvement in the investment story of other large but cheap Emerging Markets could force a rotation of flows away from India.
Moreover, the Nifty earnings give a discount to the Indian 10-year government security yield, at 2.2 ppts, also put equity valuations relative to bonds at levels only seen in 3% of days since 2005, and is a position from which one- and two . -annual returns have historically been negligible.
Read also: Expert view: Here are key risks that the market will have to deal with in 2024
The rally in the stock market in recent months reflects growing confidence in a US soft landing. In this scenario, falling yields and a weaker US dollar should support more flows into emerging markets (EM).
Stock valuations at a premium to bonds in the US and India may drive migration from stocks into bonds. A significant growth slowdown or delays to further inflation cooling are risks for equities, CLSA noted.
In this consensus soft landing scenario, a larger share of foreign institutional inflows (FIIs) will come from non-India dedicated funds, which should support mega-caps over small/mid-caps, it added.
The brokerage recommends being selective in the small and medium space. It favors megacaps, banks, insurance and energy while our underweights are consumer and IT.
It expects banks, L&T, Bharti Airtel and select material names to make a huge contribution to Nifty’s EPS growth and delivery on this will be crucial.
(Exciting news! Mint is now on WhatsApp Channels Subscribe today by clicking the link and stay up to date with the latest financial information! Click here!)
CLSA has laid out key strategies and economic themes for 2024 for the Indian stock market. Here are some of the key positive themes that will play out for Indian stocks:
Market structure: The Indian market is quite deep, liquid and very well diversified compared to the EM cohort. It has seen strong inflows of India-dedicated funds and going forward more stable inflows are expected.
Interest rates: The Reserve Bank of India is likely to cut rates in 2024 to keep real rates neutral and prevent any growth shock. Domestic inflation has moderated and the Fed is likely to cut rates soon.
Read also: India’s GDP likely to grow by 7.3% in FY24: NSO data
Coin: The rupee will strengthen in 2024 with the US dollar depreciating on Fed cuts. Moderating current account deficit and reduced FPI inflows will be additional catalysts.
China relative performance: Better growth prospects in India vs. China pushed India to surpass China in US dollar terms. However, a risk environment could shift flows to laggards such as China from India, given the extended valuation premiums.
Foreign institutional investors: FII inflows were strong, at $21 billion, in 2023, mostly from India-dedicated funds. Falling rates and a weaker US dollar will support inflows into EMs, which could flow to India as well. However, evaluation remains an overhang.
Read also: The Indian FPI frenzy is now at a nine-year peak
DII: Domestic mutual fund holdings outpaced FIIs on strong inflows by $22 billion. However, CLSA expects this to moderate due to attractive debt market returns.
Retail investors: Participation increased in the market. Their allocation to large caps hit a multi-year low. Any disappointment in Smids will hit retail investor sentiment.
IPOs: Exuberance in the IPO market, in the final quarter of 2023, should continue in 2024 as many fintech, EV, food-delivery startups consider listings.
Catch Live Market Updates here
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
Unlock a world of Perks! From insightful newsletters to real-time stock tracking, breaking news and a personalized news feed – it’s all here, just a click away! Login Now!
Catch all Business News, Market News, News Events and Latest News Updates on Live Mint. Check out all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
More or less
Published: 08 Jan 2024, 12:42 IST