Q1: What are the top three tailwinds and headwinds facing equity markets going forward?
At INVasset, we’re confident in a sustained bull run in the old economy, driven by robust tailwinds. Key among these is stable governance and growth initiatives, exemplified by significant reforms and infrastructural developments like “Make in India” and advancements in digital infrastructure, setting a solid foundation for sectors such as defense, renewables, and technology. Additionally, favorable inflation dynamics, as noted by the US Federal Reserve’s optimistic stance, provide a stable market backdrop, bolstering investor confidence and market stability. Furthermore, a shift in consumer behavior towards premium products, spurred by increased disposable incomes and lifestyle reassessments post-Covid, opens new avenues across diverse sectors.
However, the market faces distinct headwinds. Valuation concerns, particularly in midcaps and small caps, signal potential volatility and correction risks, urging cautious navigation despite bullish trends. Geopolitical tensions, influenced by pandemic aftershocks and international disputes, inject uncertainty, affecting both global and local market sentiments. Lastly, key person risk, linked to optimism around current policy frameworks, highlights the market’s sensitivity to leadership decisions, underscoring the need for balanced and strategic investment approaches.
Q.2 Is 2024 anticipated to be a year characterized by rate cuts, and how do you perceive the pace at which rates will decline in the US?
At INVasset, we closely align our inflation outlook with the Federal Reserve’s views, recognizing the Fed’s significant influence on global inflation dynamics due to the US dollar’s role in international trade. Our analysis extends beyond immediate occurrences, appreciating the Fed’s overarching impact. For example, during the March 2020 economic interventions by the Fed to mitigate the pandemic’s economic impact, the focus was largely on immediate crisis management, possibly underestimating the long-term strategic implications of such actions. Similarly, in late 2021, despite the Fed’s inflation warnings, market optimism, buoyed by previous growth, may have downplayed the potential for persistent inflation to affect global growth. Currently, with the Fed signaling easing inflationary pressures and hinting at potential rate adjustments, we acknowledge these as part of several factors affecting the markets. We understand that stock markets look ahead, implying that events like rate changes, while important, are part of a broader market narrative. These adjustments typically don’t dominate market trends in isolation unless coupled with significant geopolitical events that could alter the Fed’s trajectory or impact its policy effectiveness.
Q.3 There’s a viewpoint that the Small & Mid Cap segment in Indian Equities has become expensive, warranting caution until a significant correction occurs. Do you agree with this perspective, or are you more optimistic about the segment’s prospects?
At INVasset, we interpret the valuation dynamics of Indian mid and small-cap equities as a shift towards a ‘value run’, distinguishing it from the prior phase of quality-driven growth. Our analysis indicates that the significant rise in quality stocks from 2009 to 2020 led to inflated valuations, not always aligned with growth prospects. However, post-Covid shifts, especially in global interest rates, have spurred a renewed focus on ‘old economy’ sectors, predominantly within mid and small caps, signaling a resurgence of value investing.
Despite concerns that mid and small caps may be overpriced, we view the current market trend as a value-driven rally, not an overvaluation phase. This perspective challenges the ‘recency bias’ that compares current valuations with those of the recent past, rather than the previous ‘old economy’ boom (2001-2008). We believe that mid and small caps offer a promising potential for outperformance compared to large caps in the upcoming years due to their value proposition. Nonetheless, it’s important to recognize the increased volatility within these segments, which, while posing risks, also provides strategic opportunities for investment during market corrections.
Q.4 Which sector or thematic trend do you believe will perform well irrespective of global risks, and uncertainties surrounding domestic elections?
At INVasset, we view the BJP’s recent electoral successes and developments like the Ram Mandir inauguration as indicators of political stability, unlikely to disrupt the 2024 elections or market stability. This anticipated political continuity is expected to favor sectors aligned with government policies, particularly Capex-heavy ones like defense, railways, infrastructure, and power, which should thrive on domestic policies, offering resilience against global uncertainties.
The “Make in India” initiative is set to enhance sectors such as tourism, warehousing, and digital infrastructure, with positive prospects for housing and credit markets, supported by a stable economic environment. Additionally, with the US Fed’s reassurance on inflation, interest-rate-sensitive sectors like real estate and automobiles are positioned for growth. These sectors, benefiting from lower interest rates and reduced foreign dependencies, align with our bullish outlook on the market, which considers both global challenges and domestic political dynamics. Overall, our focus is on sectors that stand to gain from government initiatives and macroeconomic stability, underscoring our optimistic market perspective.
Q.5 How do you see sector weights change in the composition of Nifty 500 as we see approach a market capitalization of $10 trillion by the end of this decade?
Looking ahead, the Nifty 500 aims to reach a $10 trillion market capitalization by the end of the decade, requiring an annual growth rate of 14%, a figure that aligns with the BSE 500’s historical growth since 2013. This ambitious goal seems attainable with the ongoing stability of India’s majority government and a favorable global environment. The upcoming years will witness a significant evolution in the Nifty 500’s sectoral composition, with an increased emphasis on sectors aligned with government initiatives like defense, railways, infrastructure, power, and green energy, indicating their central role in India’s economic advancement.
While these sectors are set to gain prominence, foundational sectors such as technology, finance, pharmaceuticals, and FMCG will continue to be crucial, maintaining their core status within the index due to their established contribution to India’s economy and international presence. Additionally, emerging sectors vital for national development will gain focus, ensuring a diversified and dynamic sectoral representation in the Nifty 500. This balanced evolution reflects the comprehensive growth narrative of India’s economy as it progresses towards the $10 trillion milestone.
