‘A small 3-5% correction sees in Indian markets ahead of 2024 general elections’
With elections in mind, do you expect 2024 to be a year of double-digit returns?
Well, elections typically bring volatility to the market, but history has shown that the real impact on the market is not just about the election itself but rather economic policies and progress over a longer period. If we look at past trends, the market has historically given positive returns in the six months post-parliamentary elections. The Sensex and Nifty 50 have seen gains in the range of 2% to 38% in the previous 5 election years.
That’s why I’m bullish on 2024. I believe it will be a year of good double-digit gains in the market, as market valuation and the overall economic outlook both look positive. In terms of equity, I would expect high single-digit or low double-digit returns in 2024, as longer-term prospects look strong.
Did the markets run ahead of fundamentals in terms of valuations or is the risk-reward favourable for Indian equities?
India’s market is indeed shining, with small-caps delivering a 25%+ CAGR over a 5 and 10-year period horizon. But the valuations definitely seem stretched, remember that 40% of companies with positive EPS are trading at a P/E over 50 which is a very risky territory for the markets to be in. The rally, across the market, has been driven by the companies/sectors which were earlier quashed by all the research houses comprising of cyclical, asset-heavy, debt-heavy, low cash flow, low ROEs, and PSUs stocks which have otherwise remained silent in the past. Most investors have been rewarded with multi-bagger returns, and there is no fear in the market, with investors even venturing into the dangerous territories of options trading. It is essential to focus on asset allocation and to invest for the long term, because even if the Indian macros look good, the market may have run ahead of fundamentals, indicating a potential speed bump in the future.
Ahead of the elections, is there a possibility of a 10% correction?
Heading towards the election, a 10% correction seems unlikely. A smaller correction in the range of 3-5% can be expected which will also provide a great launchpad for the market to explode post the elections. Look at the outperformance; large caps are up 23% and mid-caps 58% in the last year indicating significantly overvalued stocks and a potential bubble being created which needs to burst before it grows too big.
Additionally, the geopolitical risks might still pose some threats to the market’s stability, but the Indian market is well-positioned to navigate these potential challenges. Our chronic current account deficit is on track for structural improvement, boosting investments and household savings.
Do you see mid and small-cap stocks consolidating this year? Will they continue to outperform large caps?
In my opinion, large caps are poised to outperform the broader market in 2024, making them an attractive investment opportunity for those who are underweight in this segment. Because of the innate nature of mid/small-caps stocks being riskier bets and subject to increased manipulation, the focus on individual stock fundamentals and valuations needs to be looked at in depth before making a decision.
What does your model portfolio look like currently?
As a Chartered Accountant by qualification and an Investor by profession, my model portfolio is maintained to provide stability with reasonable returns, while managing risk. Currently, it comprises 30% of individual stock investments based on fundamental research. I also invest 30% in a diversified basket of mutual funds, including equity-oriented small and mid-cap schemes. I allocate a portion (~15% each) of my portfolio to real estate investment and debt instruments only because of the safety cover it can provide. And finally, I invest 10% to gold and fixed deposits to diversify my portfolio and act as a hedge against inflation, market volatility, and a bull market. So therefore to summarize, 30% Stocks, 30% Mutual Funds, 15% Real Estate, 15% Debt Instruments, and 10% in Gold.
With so many IPOs launching, is this the right time for retail investors to grab them?
2023 saw the second-highest number of mainboard IPOs in over a decade, with 57 Indian companies collectively raising ₹49,000 crore. Interestingly, the current IPO trend is not indicating a slowdown, with IPOs worth approximately ₹60,000 crore lined up this year. Also, the upcoming elections could potentially boost market sentiment and IPO activity if the outcome is favourable.
Given the favourable macroeconomic conditions, including the expected GDP growth and India’s manufacturing story, I feel retail investors should not miss out on the opportunity of these IPOs but be selective and cautious in their approach. It is also important to note that IPOs are not the only way to enter the market, and FOMO usually takes the better, of rational investment decision-making and leads to regret later. Retail investors, investing their hard-earned money need to be confident of the Company and its fundamentals which should act as the base of their decision-making and not other factors such as grey market premium and FOMO-driven stocks.
FPIs have again become net sellers this year. Will this trend continue until the elections?
The value of FPI holdings in Indian equities surged to $738 billion in December 2023. FPIs may continue to be net sellers until the elections, driven by the uncertainty that the elections draw. Additionally, weaker global market conditions have also resulted in FPI’s withdrawing money from Indian markets which is considered as a risky bet.
Post-elections, political stability, and a favourable investment climate will attract foreign investment, with the Indian economy outperforming its Asian peers. The ongoing digitalization and formalization of the economy, along with the government’s efforts to boost growth, will continue to draw investor interest post the elections.
One piece of advice for new investors?
My advice for new investors would be to focus on long-term investments. It is essential to have a long-term perspective and not lean on short-term market fluctuations. Consistency is key, and starting young gives you the advantage of time, allowing your investments to compound and grow over the years.
Additionally, it’s crucial to educate yourself on various investment avenues, risk management strategies, and industry trends. This knowledge will help you make informed decisions and avoid costly mistakes. The financial markets are a long-term game, and success in them requires perseverance and patience.
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Published: 19 Feb 2024, 11:47 AM IST
