Did 2023 Set the Stage for a Market Revolution in 2024?

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  • 05 Jan 2024
Did 2023 Set the Stage for a Market Revolution in 2024?

Kotak Insights | Date 05/01/2024

Greetings and Happy New Year as we usher in 2024!

Indian stock markets were in for a treat in 2023. Not only did they scale all-time highs, but also delivered impressive returns.

From the IPO frenzy to the surge in mid and small-caps, the market was abuzz with activity that fuelled positive sentiments.

Let's take a swift look back at 2023 and explore the potential market landscape for the year ahead.

2023 will go down in Indian stock market history as one of its best years.

Amidst the Adani-Hindenburg saga that unfolded in January, predicting a year-end Nifty closing level of 21,700 seemed improbable.

However, reality defied expectations, and today, Nifty at 22,000 appears to be a mere formality.

India’s robust economic expansion outpaced other major economies. This also played a pivotal role in uplifting domestic equities in 2023.

A key contributor to this surge was also the growing presence of investors. The influx of investors, coupled with improved financial literacy and accessibility to financial services, resulted in an upswing in mutual fund accounts – from fewer than 60 million in 2016 to over 150 million in 2023.

Looking at the index performance, India's blue-chip Nifty 50 and BSE Sensex rose around 20% in 2023. This was their second-best year since 2017, and the indexes were among the top-performing stock indexes globally.

The real winners in 2023 were found in the midcap and smallcap space.

These stocks rose so much that questions were being asked about a market bubble.

To assess this, let's delve into the current market scenario and examine how the small-cap index compares with the Sensex today.

The rally seen in smallcaps, starting from March 2023, has been nothing short of a dream run. However, as with all favorable trends, there comes a point when the trajectory begins to shift.

It appears that this golden period for smallcaps could be nearing its conclusion. The evidence lies in the Sensex to Smallcap Ratio chart, which has plummeted to levels not witnessed since the top of the smallcap bull run in 2018.

Presently, this ratio has touched a 15-year low, signaling that smallcaps may have limited room for further outperformance. So, the landscape is evolving, and investors need to recalibrate their expectations accordingly.

This also begs the question: Are large-caps now emerging as attractive investments?

Well, it would be incorrect to paint all large-caps with the same brush. Besides, the current Nifty PE ratio of around 23 does not suggest that large-caps are cheap.

In essence, one should act with caution and a nuanced examination before investing or trading in stocks in this evolving market scenario.

As you move ahead, here are some things to keep in mind…

The benchmark index tends to exhibit volatility in a year of shifting macros, and 2024 appears poised for such fluctuations.

Several factors could influence the markets:

Geopolitical Unrest: Ongoing geopolitical tensions, including the Israel-Hamas conflict and China-Taiwan disputes, have the potential to disrupt global trade, impacting market indices. Any major hurdles to global trade, because of the geopolitical risks can weigh on the markets.

Election Influence: Elections in India and the US can bring about significant changes in the stock markets, with certain sectors potentially becoming less favorable to traders and investors. Also, stocks in the overvalued zone or with weak earnings could be the most affected in any election led market crash.

Midcap and Smallcaps: After a substantial rally in mid and smallcap stocks in 2023, a broader market correction could have a swift negative impact on these segments as these segments are more affected than the larger peers in the event of any major market downturn.

Capex Dynamics: The current capex cycle in India seems robust, driven by events like RERA, GST, and the China plus one megatrend. India has been a great beneficiary, especially with the policies like Make in India and production linked incentive schemes. To add to that MNCs like Apple resolved to make India the key sourcing hub. Any unexpected capex slowdown in 2024 could shake stock valuations that have already factored in the returns.

In summary, while the market delivered stellar returns in 2023, it has also become expensive across market caps, sectors, and themes.

The year 2024 may bring disappointments if earnings growth fails to meet expectations or if external shocks occur.

Going forward, market participants will be closely tracking the Q3FY24 earnings and management commentary for any market outlook.

Also note that India shines as an attractive destination for global investors in the current market environment. The country is viewed positively for its improved business, favorable demographics, and a friendly environment for sovereign investors. In a way, investors in Indian share markets are more optimistic.

India Ratings and Research (Ind-Ra) has recently revised upwards its gross domestic product (GDP) growth estimate for FY24 to 6.7% from 6.2% earlier. A number of factors, including the resilience of the Indian economy, which grew 7.6% year-on-year in 2QFY24, leads this revision.

Nevertheless, there are risks as well from macro as well as micro economic factors.

In all, we’d like to highlight that making predictions is complex, and no one can predict the market’s direction with 100% accuracy.

This is where diversification comes in handy for investors and traders. It can act as a key strategy to mitigate risks. Plus, it ensures investors can exploit potential opportunities while safeguarding their investments.

Allocating funds across different asset classes that aligns with your financial goals can ensure a balanced portfolio.

Whether opting for a higher allocation to stocks or exploring alternatives like gold or systematic investment plans (SIPs) in mutual funds, diversification remains a prudent approach.

Investors comfortable with having a higher risk-reward ratio can have a higher allocation to stocks. Start your journey by clicking here >>

If stocks are not the first choice, and you prefer safety over returns, you could look at gold.

Or you can simply start with a systematic investment plan (SIP) in mutual funds. Click here to know more on this.

As we embark on 2024, remember to trade and invest wisely, employing time-tested strategies and robust risk management measures.

For a comprehensive market outlook, tune into our research team's video below, where they talk about the markets, the strategy for January, and top stocks to watch out for.

Stocks & Strategy Webinar – January 2024

We’ll be back with another exciting story next week!

Until next time,

Happy learning!

Sources: Kotak Securities, Economic Times, BSE, NSE

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

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