Indian equity markets recorded a massive boom in 2023. What are you expecting in 2024?
The outlook for the Indian equity markets for 2024 also continues to remain robust. The year 2023 gave about 18 per cent annual return (in terms of Sensex). However, the overall market cap of all listed stocks moved up by about 26 per cent in CY2023 – the year CY2023 added over Rs.80 lakh crore of market cap incrementally to overall market cap to hit a life-time record high of Rs.364 lakh crore! Such a record rise was largely due to the massive boom in small and mid-cap (SMC) stocks and partly due to the debut of a huge number of stocks into the secondary markets on account of the boom in IPOs. While Sensex / NIFTY gave around 18 per cent yearly returns, the Small and Mid-cap indices gave 47 per cent to 46 per cent annual returns respectively in 2023! While Sensex / NIFTY are likely to repeat around 15 per cent annual return in CY2024, the Small and Mid-cap (SMC) indices are most unlikely to repeat the kind of returns they made in 2023.
“My suggestions to the retail investors are: don’t run after blindly small and midcap stocks but be selective – parameters to be used for being selective in the small cap segment are: valuation comfort; potential of business models; hidden deep values; and quality of balance sheet & management.”
Why should the Indian markets repeat the rally in 2024?
There are four factors, which would lead to a repeat of decent rally in the broader market in 2024. First of all, reversal of interest rate cycle worldwide in 2024. Starting from the US, the world economies should see the beginning of cuts in the benchmark interest rates from early 2024 and the same would be positive for the Indian markets in terms of both inducing domestic investments and encouraging larger inflows of foreign capital.
On the domestic front, India’s fastest GDP growth among the major economies expected in 2024 would encourage large inflows of foreign investments in both equity markets and also through Foreign Direct Investments. Such a possible scenario is likely to lead to strengthening of the Indian rupee exchange rate and the same would encourage FIIs to increase allocation to the Indian markets in 2024. Secondly, the recent State assembly elections results give more confidence on the political stability, which always favors the equity markets. Thirdly, continued inflow of new retail investors into the capital markets – over six to eight lakh new investors are continuing to enter the capital markets every week and the total investor base has breached 15-crore mark now. Year 2023 added around 3.20 crore new investors and it is quite possible that the year 2024 might add at least another two crore investors. The same would lead to larger flow of savings of households into the capital markets which in turn would enable the domestic equity market to perform well in 2024.
“At the broader level, the large caps are expected to outperform the SMC segment in 2024. It is also possible that select small and mid-cap stocks would continue to create wealth for the investors in 2024. Over 6 crore new individual investors entered the markets in the last two years alone and would continue to invest majorly in small & midcap stocks.”
What could be the possible ‘Risk to the Market emanates from the Small Cap Segment’?
The Indian market capitalization touched a life-time high of around Rs.357 lakh crore. The SMC segment is beating the Sensex and NIFTY by a huge margin whatever timeframe we take since March 2020 as new retail investors are pouring into the markets and they continue to lap up SMC stocks. Many new investors seem to be buying the SMC stocks regardless of valuation and quality of management & balance sheets. Valuations of small cap stocks are highly stretched. While the Sensex trades at a trailing PE of around 25, BSE Small cap index is trading at a trailing PE of close to 32. However, it should be noted that 32 PE of the Small cap segment is just a proxy for over 4,000 small cap stocks actually listed and many of them trade at over 30 to 60 PEs!
Considering the past experience, relative valuations, constraints in finding adequate liquidity to support the small cap stocks and lack of adequate support from the institutional investors, there is a possible risk of the small cap segment falling quite badly in 2024.
However, large cap stocks (especially Sensex / NIFTY) are likely to give a decent return of around 15 per cent in 2024 due to their attractive relative valuation and India’s robust economic growth outlook. Any possible revisit of any aggressive Covid variant or steep jump in crude oil prices substantially beyond $100 a barrel alone are possible major risk factors for the overall Indian equity markets. Otherwise, the Sensex / NIFTY are expected to rally another 15 per cent in 2024.
Do you find at present Mid & Small-caps placed better to create higher wealth in FY24?
Of course, the Indian Equity Markets would continue to offer Wealth Creation Opportunities in the Select Small and Mid-cap stocks in 2024 as well. Though at the broader level, the large caps are expected to outperform the SMC segment in 2024, it is also possible that select small and mid-cap stocks would continue to create wealth for the investors in 2024. Over 6 crore new individual investors entered the markets in the last two years alone and would continue to invest majorly in small & midcap stocks. However, as valuations are stretched enormously in the small cap stocks and there is no adequate appetite for the infusion of liquidity into many small cap stocks by the institutional investors (due to over-valuation), it would be better to stay invested only in select small and midcap stocks on the basis of valuation comfort and, quality of balance sheet & management.
“Over six to eight lakh new investors are continuing to enter the capital markets every week and the total investor base has breached 15-crore mark now. Year 2023 added around 3.20 crore new investors and it is quite possible that the year 2024 might add at least another two crore investors. The same would lead to larger flow of savings of households into the capital markets which in turn would enable the domestic equity market to perform well in 2024.”
What advise you’ll give to our readers?
As stated earlier, my suggestions to the retail investors are: don’t run after blindly small and midcap stocks but be selective – parameters to be used for being selective in the small cap segment are: valuation comfort; potential of business models; hidden deep values; and quality of balance sheet & management. And then tilt (at least around 50 per cent to 60 per cent equity assets) towards large cap stocks in 2024 so that the equity wealth created in 2023 can be relatively protected and also can be grown steadily for the future.
