In recent years, Indian equity investors have enjoyed significant returns, with the Nifty outperforming global markets since its pre-pandemic and 2021 highs. The BJP’s resounding victory in key states like Madhya Pradesh, Rajasthan, and Chhattisgarh has improved the party’s prospects for returning to power at the Centre in 2024. The focus now shifts to how the state election results might further impact the outlook for equity markets.
As we approach 2024, equities may experience volatility influenced by global factors but are anticipated to continue an upward trend. The increased likelihood of political stability following the state elections is expected to resonate as the general elections draw nearer.
Optimism is also fueled by expectations of earnings growth after a robust Q2 FY24 and the potential for higher economic growth, supported by strong Q2 GDP numbers (7.6 percent growth), maintaining positive sentiments in the market.
Considering this backdrop, investors are keen to understand what to expect in CY 2024. While predicting market movements is challenging, we can identify factors that will likely drive markets in the near to medium term.
Global Factors and Volatility:
India remains interconnected with the global economy, with over half of global equity market capitalization represented by the US equity market. Indian equity markets will continue tracking the US markets, which have shown signs of struggle amid elevated inflation and recession risks. However, the recent Fed meeting signaled a nearing end to the rate hike cycle in the US, providing relief to equity markets globally.
Global equities, including those in Europe, the US, and India, have seen gains since the last Fed meeting, supported by the belief that the peak rate hike cycle has passed. Despite potential recession worries, the Fed’s hesitation to tighten further could instill hope in both equity and bond markets globally.
Election Year Dynamics:
Most election years have a dominant theme shaping financial markets. With the state election results pointing toward the continuity of the current regime at the Centre, the question arises whether 2024 can replicate the rally witnessed in 2014 when the NDA government came to power. However, elevated valuations in the domestic market and global risks such as China, European recession, and US economic concerns could limit liquidity.
Long-Term Growth Story and Profit Cycle:
India’s long-term growth story remains compelling, even beyond short-term valuation concerns. The Nifty has shown significant profit growth in Q2FY24, with expectations of healthy earnings growth in H2 FY24. Factors such as improved bank and corporate balance sheets, corporate tax reforms, and the PLI schemes can support India Inc.’s profit cycle in the medium term. The emergence of new industries and India’s geopolitical influence further contribute to the positive outlook.
Overall, 2024 may bring volatility to equities driven by global factors and election rhetoric. Still, political stability and robust earnings growth could pave the way for a sustained rally. Investors are advised to be selective in stock choices, recognizing that market dynamics may not uniformly favor all sectors.