Banking, IT promising in 2024: What sectors should investors bet on?

Banking and IT are two promising sectors that have delivered relatively muted returns so far but have the potential for improvement in earnings trajectory in 2024, according to Quantum Mutual Fund. 

"Favourable credit cycle coupled with a revival in corporate credit offtake can drive earnings of banks. A likely soft landing in the US can trigger a faster conversion of deal wins to revenue in IT sector. Apart from fundamental reasons, these two sectors could be major beneficiaries of a reversal in foreign portfolio investor (FPI) flows," said George Thomas, Fund Manager, Equity, Quantum AMC.

Moreover, investors need to be selective this year as most sectors have seen a favourable earnings cycle along with stellar returns. "The trajectory of consensus earnings estimates of a sector along with recent return profile can provide insights to identify the next set of market drivers," said Thomas. 

 

As indicated in the below graph, small and mid-cap stocks have recorded relatively better returns compared to their earnings growth. Apart from normalisation in earnings, higher flows into these categories have contributed to the superior returns in the segment. Cumulative share of flows into small and mid-cap categories over the past 3 years stands at 28.3% Vs AUM share of 19% (Source: AMFI, Data as of Nov-23). 

Note: 

Companies with a listing history of atleast 5 years is sorted by market cap (Highest to Lowest)

Median EPS CAGR is computed for stocks with meaningful EPS growth values within the category

On the back of relatively lower historic returns compared to earnings growth, large caps appear favourable on a risk-reward basis, noted Thomas. 

What should an investor do?

"Notwithstanding the above-average valuations, the favourable earnings cycle and policy stability make us positive on equities over the medium term. The reasonable earnings growth in the medium term could make valuations seem rational over time. The domestic economy is in fine fettle while the global economy could stabilise as interest rates start their downward journey. Unlike prior election years, the base case of policy continuity could limit the volatility around the election period. While the current setting doesn’t indicate chances of a material correction, staggered investment may be considered for fresh investments to benefit from any near-term volatility," said Christy Mathai, Fund Manager, Equity, Quantum AMC. 

Some of the key investment themes for the calendar year 2024 as per ICICI Direct are:

• Capex Cycle – a combination of Core Sectors, green growth and PLI

• Cement – Healthy utilisations likely amid expanding capacity

• Steel – capacity to double amid green focus

• Auto Sales - premiumization trend getting stronger

• Banks – back on strong footing

• Real Estate experiencing decadal revival

With green shoots of continued corporate earnings momentum, healthy GDP growth, benign commodity price outlook and possible rate cuts globally, India is in a sweet spot compared to its peers, ICICI Direct said in its report. For 2024, the brokerage's top picks include UGRO Capital, SBI Cards, NMDC, Uno Minda, Greenply Industries, Birla Corporation and Grindwell Norton.

Growth stocks will be the focus for 2024 

Brokerage Motilal Oswal believes growth stocks will be the focus of 2024 given the government’s  approach towards longterm capex across key areas, along with expectations of rate cuts globally in 2024. It expects BFSI, Industrials, Real Estate, Auto and Consumer Discretionary to do well going forward. 

"We believe that over the next couple of quarters, sector rotation could be an important driver along with the overall market uptrend. We also believe valuations will become an important factor in stock selection to drive outperformance in portfolios," it said in a note. 

Its top picks for 2024 include SBI, Hero Moto, Spandana Sphoorty, L&T, Dalmia Bharat, Tata Consumer, Syrma, Coal India, Prestige, Zomato, LTTS, Oil India, Sun Pharma, Kajaria

Domestic cyclicals will do well

According to Axis Mutual Fund, investors can expect the strong performance of domestic cyclicals to continue for the remainder of FY24, driven by better-than-expected margin improvement in automobiles and stable NIMs for banks. Consumption-based sectors would remain under pressure given the lacklustre rural recovery.

JM Financial Asset Management is bullish on banking, real estate, automotive, electricity and PSUs. It believes flexicap funds for long-term investors and SIPs in mid-cap funds will continue to perform well.

Satish Menon, Executive Director, Geojit Financial Services is keen on capital goods, infrastructure, cement, and renewables sectors, driven by the manufacturing story in India. For the long term, Menon is bullish on export-centric sectors such as pharma and chemicals.

The key takeaway is the importance of a meticulous and selective approach, identifying high-quality stocks with long-term growth potential available at a significant discount to intrinsic values.

FII inflows are poised to overshadow DII inflows in 2024, with expectations ranging from $40 to $50 billion. "The transformation away from China and Fed rate cuts are pivotal factors driving these inflows. Power, banking, technology, future mobility, and infrastructure emerge as the top sectors for investors in 2024," said Dr Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital

For 2024, Gupta recommends a flexicap portfolio allocation to banking, technology, power, railways, and future mobility. "Hedging with a global portfolio of US and global technology stocks offers resilience against election outcomes. Direct investments in thematic portfolios, focusing on power, railways, technology, EV, and others, provide added diversification and potential rewards," noted Gupta.