Will stock markets stay high in 2024?

Indian markets have been on a gaining spree in last two months while the five state election results have further boosted sentiments, calming down jittery investors. Image: Shutterstock

Even as investors are betting on Indian stocks for higher returns in 2024, there is also a growing sense of caution due to the nervousness around the general elections in May and a widening inflation that may hit the overall cost of capital. Despite volatility and weakness in the first half of the year due to multiple factors such as geo-political crises, the rise in the bond yields and commodity prices increase, Indian markets are closing 2023 with healthy returns.  

The party is expected to continue in 2024 as well, at least in the first quarter of the year. “We continue to remain quite positive on the Indian equities,” says Rupen Rajguru, head of equity, investments and strategy, Julius Baer India. He explains that the scenario has turned quite positive in the past couple of days with the US Federal Reserve holding interest rates, signalling an end to the rate hike cycle and adopting a pretty dovish stance, leading to softening of US bond yields and dollar index.

“This is a perfect recipe for a risk-on environment and revival of flows to equities, especially emerging market equities. The Indian markets have got a further booster dose in the form of a favourable outcome in the state elections, to some extent addressing an impending political uncertainty,” he adds.

According to him, investor money will continue to chase asset classes generating returns and where there is decent visibility. In the Indian markets, equities have clearly emerged as one asset class, which has delivered robust returns, and with a positive set-up and healthy outlook, it will continue to be the preferred investment destination for Indian investors, he explains.  

Indian markets have been on a gaining spree in last two months while the five state election results have further boosted sentiments, calming down jittery investors. Markets have overall gained 17 percent since January after a turbulent phase.  

An optimistic Ashutosh Bhargava, fund manager and head, equity research, Nippon India Mutual Fund, feels that as we enter 2024 there are many good news on growth, inflation, and the US Fed pivot and earnings front, but valuations have also rerated meaningfully. “While there is less nervousness and more comfort now, the return expectation has to turn moderate. 2024 returns are unlikely to be as broadbased and strong as 2023 but still equities may not disappoint if return expectations are close to 10-12 percent,” he says.  

Besides corporate earnings growth, inflation, economic growth, the general elections next year are critical for stock market investors, especially for foreign institutional investors (FIIs) which have just started to return to Indian stocks.  

Key to watch in the 2024 general elections is if the opposition alliance, called I.N.D.I.A., can put up a credible seat-sharing arrangement, which polarises the general elections and reduces the predictability of the outcome. Typically, elections have the propensity to create extreme outcomes for the stock market. Historically, the market has favoured continuity and a majority government, as this implies limited policy shifts post-elections. 

Analysts at Morgan Stanley expect the benchmark Sensex to rise 14 percent by December 2024 on the assumption of continuity in a government with a majority mandate, robust domestic growth, that the US does not slip into a protracted recession and benign oil prices. Government policy remains supportive, and the RBI executes a calibrated exit from its current hold stance.  

Morgan Stanley’s target suggests that the Sensex will trade at a trailing price-to-earnings multiple of 24.7 times, ahead of the 25-year average of 20 times. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India. 

Also read: Will state election results reprice risks, give wings to stock markets?

Concerns ahead?

In a bear case scenario, Morgan Stanley analysts warn the Sensex may tank to 51,000 if elections deliver an unclear mandate with a change in government, oil prices surge past $110 per barrel, the RBI ends up tightening to protect macro stability and a US recession leads to lower global growth. “With strong earnings, macro stability and domestic flows, it is hard to argue against India's investment case. That said, an event-heavy calendar with potential binary outcomes sets the market up for volatility, after having been less volatile than ever,” they say.  

Besides elections-related uncertainties, steep valuations of Indian markets are also worrisome. The Nifty is trading at a 12-month forward price to earnings ratio of 18.4 times. “The market cap to GDP ratio has reached levels, which signal potential overvaluation and suggesting caution as the market may have priced itself well ahead of the curve,” Kenneth Andrade, founder and director-Old Bridge Capital Management, and CIO-Old Bridge Asset Management, says.  

“As we look ahead to 2024, there are areas of caution,” he adds. Small and microcap spaces raise concerns, and there is an anticipation of volatility, especially in segments where valuations appear stiff.  “Despite these short-term challenges, the overarching trend seems to favour India, presenting a higher growth potential relative to peer countries in the region,” he says.