Benchmark stock market indices hit new record highs on Thursday. The BSE Sensex surged 1.3 per cent while the Nifty50 gained 1.2 per cent, tracking the rally across several global markets on the back of the US Federal Reserve turning dovish and forecasting interest rate cuts in 2024.
The Sensex hit an all-time high of 70,602.89 before settling at 70,514.20, up near 930 points. The NSE Nifty50 hit a high of 21,210.90, before closing at 21,182.70, up 256 points.
The rally on Thursday adds to the momentum that markets have gained in recent months amid strong GDP growth, compared to the gloomy recessionary fears that everyone was talking about at the beginning of the year in developed markets like the USA. Strong foreign institutional investment flows and continued rise in domestic flows have led to the benchmark indices rallying close to 16 per cent so far in 2023.
But, more than the large caps, it is the mid and smallcap stocks that investors have lapped up this year; the BSE midcap and smallcap indices have jumped more than 40 per cent in 2023.
A better-than-expected 7.6 per cent GDP growth in the July-September quarter, the BJP winning elections in three of the four assembly elections held last month as well as a declining inflation in the US, coupled with strong GDP growth and raising expectations that the Federal Reserve is done raising rates and 2024 will see several rounds of interest rate cuts, have cheered investors.
But, amid the euphoria, are valuations looking stretched, and will we see any correction ahead?
"There is still cash waiting to be invested in the market and it is not like people have sold their homes and put the money into equity yet. Baring a few pockets where there is irrational exuberance, the rest of the market, while looking a little bit on the higher side of valuation, is not euphoric," said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company.
Importantly, he pointed out that many of the other emerging markets are virtually shut from an investment point of view. For example, you can't invest in Russia because of geopolitical reasons; investors will also be cautious on China and Taiwan given the tensions between the two neighbours. Also, while Brazil's market is attractive and cheap, investors are circumspect due to the left-leaning government there. Hence, the Indian market is looking brighter, he pointed out.
So far in 2023, foreign portfolio investors have pumped in over Rs 1.44 lakh crore in India's equity market. In 2022, they had pulled out Rs 1.21 lakh crore from the market.
Harsha Upadhyaya, the chief investment officer at Kotak Mutual Fund said equities will still give reasonable rate of returns next year, but, he warns there could more volatility ahead, especially in the mid and small caps.
"At this point, you will still be leaning towards markets moving higher, but it may not be a one way market from here on. The volatility will come and bite at some point. So one should be ready that probably the returns that you have seen in the last three years, especially from the lows of the Covid disruption, cannot continue for ever without volatility," he said.
Upadhyaya said there is a lot more euphoria currently in the microcaps and small and medium enterprises segment, and large caps currently look the safest in terms of valuation.
"Purely on valuation, a lot more comfort is on large caps, the comfort level goes down as we go into mid and small cap baskets and obviously, there is too much of speculation in the microcap and SME segment. Within the equity allocation, one should probably be slightly overweight on largecaps and as you go down the market cap, you should keep reducing a little bit of your exposure just to make sure you are not taking too much risk on the valuation side," he said.
Kotak Mutual Fund highlighted seven key themes that could aid the markets in 2024. It pointed out that India was entering a significant multi-year capital expenditure cycle, marking a pivotal moment for economic growth. There was an increased focus on key sectors like defence, railways and infrastructure, which are crucial for India's long-term development. Healthcare spending was also set to increase. Furthermore, the real estate sector is showing signs of improvement, which could aid home building material companies.
The financial services sector was set for strong growth, with robust loan and deposit expansion in the banking sector, mutual fund assets under management rising from Rs 39.5 lakh crore in October 2022 to Rs 47.8 lakh crore in October 2023 and demat accounts surging from 3.6 crore in 2018 to 11 crore in 2023, the fund house stated.
Kotak also sees a structural push to India's manufacturing sector coming from companies diversifying production beyond China and the production-linked incentive schemes of the central government. This could fill the missing piece in India's growth puzzle, it said.
Also, the infrastructure development and local manufacturing could lead to a rural revival, it added.