Expert view: Here are key risks market will have to address in 2024
Market has initiated 2024 with a positive stance, the outlook for equities appears promising, however equally favorable projections are for debt, commodities, and real estate. Equities is starting the year at premium valuation; it will have to handle headlines and hold-on to the rally waving since November 2023.
The globe is on a risk-on rally in anticipation of the peak-out of the interest rate cycle. The monetary policy is expected to reverse in 2024 from hawkish to accommodative. The market is anticipating 4 to 5 Fed rate cuts, 100 to 125bps. US 10yr bond yields have already cut by more than 100bps in Q4CY23. Hence, there is a concern that the market may have already factored in a substantial portion of the future cuts, as the likelihood is that most adjustments in repo rate will occur later in the year. This is because core inflation is rigid and forecast to be above the long-term target, not worthy to adopt deep cuts in rates. Additionally, central banks are expected to continue quantitative tightening to address excess liquidity in the financial market resulting from the expansive policies implemented during the pandemic, not an advisable period for equities.
The current upswing in the domestic market is driven by the prospect of a pre-election rally, following the favourable mandate for the BJP in the Hindi region state election results on December 3rd. One to two months before the state election, India was underperforming. Post, MSCI India is up by 14.3% since Oct 31st, compared to MSCI World 12.5% and MSCI EM 9.6%. Its seems that India is on a strong pre-election rally, underpinned by a favourable eco-political landscape, with foreign funds showing heightened interest in anticipation of the continuation of supportive industrial policies. Well, the actual result of national election can be expected by May to June 2024. The market is rallying ahead time, board market is up by 23% in the last 2months.
Domestically, an additional hurdle emerges in the form of heightened food inflation in this El-Nino year. Foodgrain prices have already started to increase due to the below average 2023 monsoon and heatwave. The uneven distribution of rainfall has adversely affected Kharif yield, and Rabi production is forecasted to decline by -5% YoY owing to the ongoing heatwave. Importantly, the actual rainfall of next year 2024 monsoon will also play a key role in agriculture and the rural sector, as the reservoir levels are below the long-term average. We should also expect the RBI to hold rates high in H1CY24.
Finally, there’s the aspect of premium valuation. Both India and US markets are trading at a one year forward of 20x, above the long-term average, which is a paradox when the global economy is forecast to contract in CY24 while India is an exception. The ongoing rally is supported by high domestic inflows, an upside in domestic economic growth, high fiscal spending, quantitative easing, a fall in hyperinflation & geo-political issues, and the anticipation of a change in monetary policy.
However, the above aforementioned risk factors are anticipated to exert an influence on India’s performance, although sustained outperformance may persist owing to a robust domestic eco-political framework. Currently, we expect a modest return on the main market of 10 to 12% in CY24. It is advised to diversify the investment pattern to multi-asset. Strong domestic economic growth and stable high interest rates will generate decent returns on other assets like debt, real estate, and commodities. It is suitable to be diverse when equities are trading above the long-term average for a prolonged period.
The author, Vinod Nair is Head of Research, Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 07 Jan 2024, 12:37 PM IST
