"From current valuation levels, upside looks fairly limited in the equity markets in 2024 despite the healthy expected earnings growth of the index," Varun Lohchab of HDFC Securities says in an interview to Moneycontrol.
Hence, he feels the markets may deliver high single digit returns from current levels but double-digit returns would be difficult to achieve.
The research head in institutional equities with 18 years of experience in Indian equity markets says in 2024, the recovery of rural economy in India will be keenly monitored as this is one of the drivers of domestic economy which is yet to contribute towards growth in any substantial way.
Q: Are the valuations still looking attractive in power sector, even after recent run up?
While we strongly believe in the medium-term growth story of Indian power sector led by capex in the renewal energy segment, we are of the view that valuations of the power stocks look full now, from 12 months perspective. As India is poised to become an economic superpower in coming years, rising energy demand is expected to drive accelerated infrastructure creation in segments of renewal power generation and transmission.
On top of it, innovative financing solutions such as infrastructure investment trusts (InVits) and green bonds are enticing developers to invest towards capacity creation in the power sector. This bodes well for the growth of sector in the medium term, however current valuations of power stocks don’t leave any margin of safety for the investors. So, this would be prudent to wait for a more suitable entry point.
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Q: Which are the sectors/themes that you selected for investment for 2024?
We prefer sectors which offer margin of safety with respect to either earnings or the valuations. In the current context, we believe large banks offer margin of safety on both the fronts as they are expected to grow at 15 percent in the next year despite building in NIM (net interest margin) compressions and trading at below long-term average valuations.
Additionally, in our view IT sector is trading at reasonable valuations. By H2 of CY24, some pickup in demand is expected to be witnessed in the sector as well. Hence, IT sector also looks to be suitable for investing.
Apart from this, sectors such as oil & gas primarily led by OMCs (oil marketing companies) and gas companies and pharmaceuticals (formulations players) offer decent risk adjusted returns from these levels.
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Q: Do you expect similar (2023) kind of returns from the equity benchmarks in 2024 too? Factors that you think are already discounted by the market.
Nifty is currently trading at around 20X FY25 EPS after recent run up in the last two months. This level is approximately one standard deviation above the historical average, but it is not in a super expensive zone. So, from current valuation levels, upside looks fairly limited despite the healthy expected earnings growth of the index.
Hence, in our view markets may deliver high single digit returns from current levels but double-digit returns would be difficult to achieve. Additionally, market already seems to have discounted major portion of expected earnings growth of the next year leaving little room for incremental appreciation.
Q: Where do you want to invest for 2024, if you have Rs 10 lakh?
From the asset allocation perspective, it would be prudent for an investor to stick to his/her long-term investment objectives while being mindful of one’s risk appetite. In the current market context, equity valuations look a bit stretched, hence fresh equity allocation shouldn’t be very aggressive.
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At the same time, expectations of interest rates decline in H2CY24 make bonds slightly more lucrative. Overall, investors should consult their financial advisors to make appropriate changes to their asset allocations in accordance with their long-term investment goals.
Q: Do you expect the DIIs and retail flow in equity to remain strong in the coming year too, or much more than previous year?
With consistent GDP growth, discretionary savings pool of middle class of India is rising every year. Additionally, as is evident by meteoric rise in overall demat accounts of investors, awareness and understanding about equity investing in the country is witnessing rapid enrichment. This coupled with subdued returns in other asset classes such as real estate, is making equity a preferred asset class for domestic investors.
In this backdrop, we believe, DII and retail flows are expected to remain buoyant in the coming year too, however this is not expected to be significantly higher than previous year as return expectations from CY24 is lower than that generated in CY23. Relatively lower returns than previous year and higher volatility of equity will incentivize investors to diversify a portion of their corpus by investing in bonds/bank deposits as well.
Q: Do you expect the Fed to start interest rate cut in the first quarter of 2024 and will it be more than 3 cuts in 2024?
As inflation in the US has come down to 3.1 percent in November 2023 from a significantly higher level of 9.1 percent in June 2022, it has given the Fed sufficient headroom to cut rates hereon. As inflation is still meaningfully away from official target of 2 percent, hence we expect Fed to start cutting interest rates only in Q2CY24 after monitoring additional data points on inflation, unemployment, and GDP.
Additionally, it is expected to implement 3 rate cuts in 2024 in a calibrated manner. Possibilities of additional rate cuts arise only if US economy falls into a deep recession, which in our view is a low probability event.
Q: Are you super bullish on the PSU space, even after stellar run they posted in the past quarters?
We aren’t extremely bullish on PSU space anymore. In our view, undervaluation in PSU stocks has been well captured by investors in past few quarters and now they are trading at fair valuations. They aren’t very expensive either and offer balance risk reward. Hence bottom-up stock picking is advisable in this space.
Q: How do you summarize the year (2023) passing by?
Year 2023 started with the fear of a global recession and expectations of larger interest rate hikes by global as well as domestic central banks which reflected in subdued equity market returns in first quarter of the calendar year. However, equity indices swiftly rebounded April’23 onwards on the back of rate hike pause by RBI, strong FPI flows and a sharp drop in brent crude prices. A more impressive market rally was witnessed in H2CY24 (November 2023 onwards) when GDP growth no. of 7.6 percent surprised the street positively and US Fed indicated start of a rate cut cycle in 2024.
These factors further encouraged the domestic and foreign investors both to pour additional money in Indian equities as India offered much higher expected growth in coming quarters compared to its peer countries. Overall, 2023 will be remembered for a dynamic midcap and small cap rally, bustling Indian primary market and strong FPI flows apart from achieving an extraordinary accomplishment of crossing $4 trillion market cap by country’s equity markets.
Q: What are the factors to look at in 2024, which can support and dent market?
Calendar year 2024 is expected to provide answers to many much-awaited questions such as: future of domestic and global inflation trajectory and hence stance of central banks, timing, and pace of interest rate reductions in US and India, outcome of general elections in India and hence government’s policy stance impacting various sectors of the economy. In our view, these are few key factors which will occupy attention of investors.
Apart from this, recovery of rural economy in India will be keenly monitored as this is one of the drivers of domestic economy which is yet to contribute towards growth in any substantial way. On the global front, US economy and extent of recession, if any, will be keenly watched as this would decide the fate of India’s export focused sectors such as IT, engineering goods and pharma.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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