India is set to become the third-largest economy by 2030 and will be the fastest growing economy in the next three years.- S&P Global- Global Credit Outlook 2024- Report.
What returns should investors Expect from Equity Markets?
Markets are the reflector of the Real economy, and here I mean by ‘Real’ is the Nominal GDP, which is Real GDP + Inflation. So, if the ballpark headline GDP growth number is 6%-7% (depends on whose report you read), Add an average of 6% inflation to it and we reach a number of 12%-13%. This is what Equity investors should bare minimum expect from Equity markets, in the long run. And Historically SENSEX has delivered returns in the range of 15%-16% CAGR.
India is projected to maintain a strong growth trajectory, with its GDP expected to grow at a rate of 6.4% in 2024 and 7% in 2026.- S&P Global.
2023: A Recap:
The NIFTY-50, a frontline index in India, performed well in 2023. However, when compared to the US S&P 500’s 26%+ rally, it wasn’t as exciting. But, India managed to save face with a modest 5% gain in 2022, while the S&P 500 experienced negative returns in 2022.
2023: Returns in the large and mid-cap indices were primarily driven by growth in earnings, with a relatively unchanged earnings multiple. This suggests that the earnings upcycle that began in FY22 is strengthening.
What should Investors expect from 2024?
The stock market saw a surge of activity starting in April 2023, with the NIFTY 50 index hitting its lowest point of 16800, before shooting up and ending the year at 21700. This represented an impressive jump of over 30%, and overall, the NIFTY 50 index delivered 20% returns for the year 2023. It was truly a dream year for investors.
India’s economy remains strong despite global challenges.
Key Reasons:
- Domestic demand,
- Infrastructure Investment by govt.
- Strong Corporate earnings.
- Liquidity
- China’s struggle continues.
- Under Control: Inflation & Interest rates.
India’s Retail Inflation.
*Inflation: Well within RBI’s comfort zone of around 6%.
Repo Rate: Benchmark Interest Rates:
*Interest rates have peaked and have little chance of spiking further.
Corporate Earnings:
Source: Franklin Templeton / Bloomberg; Nifty 50 EPS estimates. India Corporate Earnings Remain Strong Double-Digit Growth in EPS Forecast || December 2001–December 2025(F) || CAGR= Compound annual growth rate.
This decade should witness strong earnings growth, as last decade was dismal.
Historical Performance of SENSEX (on a Decade-wise basis):
Indian Stock markets grew at slower pace during 2010-2020 decade when earnings was not supporting growth.
NIFTY-50 valuations:
NIFTY-50 Valuations are in line with its long term historical averages, Large Cap are at a discount to Midcaps & Small caps. However Midcap/ Small cap have always traded at higher PE valuation to NIFTY-50.
Strong corporate earnings, supported by robust government capital expenditure, all-time high tax collections, and the expected continuation of the incumbent government and its policies make a strong case for the markets in this decade.
GDP growth forecast by S&P global:
India stands out among large economies due to the expected decline in China’s economy in the next 3-4 years and the huge gap from its previous double-digit growth, which it managed for 3-4 decades starting from 1980.
Source: S&P Global.
Strong Domestic investors Participation:
Domestic participation in the equity market is likely to increase via the expansion of systematic investment plans and greater participation by insurers and pension providers. This could potentially drive US$30 billion in flows to the market. Increased foreign investor allocation can add further new capital to the market, supporting a market Re-rating.
Mutual Fund Monthly SIP book has grown consistently from Rs 11,305 crore in December 2022 to an high of Rs 17,073 crore in November 2023. This is roughly USD 2 Billion getting pumped in Indian Equity markets every Month.
Now do we really need to fear FII outflows ?
For a change India is driving Indian equity markets. FII pulled out more from Indian stock markets than they pumped in calendar year 2023.
FII: Foreign Institutional Investors || DII: Domestic Institutional Investors.
ROADBLOCKS:
Scaling up is never a smooth ride. Below mentioned factor can drag the markets.
- Middle East: There is lot happening there. From Israel- Hamas conflict to the threat of Iran getting directly,indirectly involved in the conflict. Further Iran backed militants (Houthis) are blocking key trade route on red sea, taking them into a direct conflict with the US forces.
- Tail risk for Energy Markets: Simmering tension in the Middle East can jack up oil prices which will directly impact us, as we import for most of our energy needs.
- Corporate Sector Earnings: Q3 FY 24 results of HDFC Bank spooked the Markets and NIFTY-50 tanked by 2% on 17th Jan 2024. Though it was in line with the analyst expectation but it’s reverse merger with its parent group HDFC LTD led to institutional sell off. Else till now other NIFTY-50 have reported strong corporate earnings, especially IT sector. Strong Corporate earnings is the fuel which share markets runs on.
- Russia-Ukraine: The war is still not over.
To Sum it up: India is projected to have the strongest economic growth among large economies in the coming decade. This is due to a number of factors, including robust corporate earnings, a shift of manufacturing from China, a stable government, and its reformative policies. As an investor, it is advisable to remain invested in equities with a long-term horizon, ensuring proper asset allocation, and periodic recalibration of equity levels and market cap allocations.
