As markets scale new peaks, bet on gold, select small-and mid caps

As Indian markets scale newer peaks, investors must diversify assets to generate better returns. Among them, equity, fixed income and gold are the best bets, according to Emkay Wealth Management. 

India stands out

With inflation moderating and interest rate hikes peaking,  global growth is expected to bottom out at 2.8 per cent in calendar year 2023 and rebound to 3 per cent in 2024. Amidst this, India stands out among all other markets, growing faster than the rest of the world, said Emkay Wealth Management during a roundtable discussion on Thursday.

" We are at a critical juncture as far as the equity market and investments are concerned, largely we believe that there will be limited implications of international developments on the Indian markets, barring a spike in crude oil prices. In the recent past Indian markets have shown little to no implications of the movements in the US equities. We expect a lower double-digit growth for the Indian market in FY24 provided there are no major negative surprises," said Dr. Joseph K Thomas, Head of Research, Emkay Wealth Management .

 

While the forecast for growth for major economies is far lower, and growth in China is placed at around 4.5-5 per cent, the rate of growth in India will stand out comparatively better. This should provide an edge to the local markets in terms of their earning profile and momentum, explained Thomas.

Select small and mid-caps to outperform

The brokerage believes select small and mid-caps can outperform as the valuation gap with larger peers closes. Emkay Wealth prefers structural growth companies over cyclical ones as it believes the peak of the commodity cycle is behind us. 

Among the various asset classes the brokerage has seen a lot of traction and opportunities in the small-cap space in India and also the manufacturing and consumer focused companies are expected to do well in the next few years due to favorable government policies and favourable demographics at play.

Emkay believes in dynamic asset allocation for large portfolios even as smaller portfolios stick to the basic asset allocation.

Also Read: Sensex at record high: Time to rebalance your portfolios, book profits?

Bright prospects for gold

The brokerage believes prospects for investment in gold are pretty bright. "A mild recession and weaker equity earnings in the US are positive for gold. The Chinese economic growth on a positive trend is good for consumer demand for gold. The USD peaking out is good for gold with good positive returns 12 months after peaking. The tailwinds for the rupee are always positive for domestic prices of gold. Any escalation of geopolitical tension may create an uncertain global macroeconomic situation and thereby push up gold prices," it said.

Thomas belives allocation to gold should be kept at 5 % to 10%. "Gold prices may be supported by economic sluggishness and related uncertainties in the immediate term. US interest rate trajectory will be the single most influence on gold prices alongwith Dollar Index movements. At any time a weaker Dollar with sustain a rise in gold prices," said Thomas.

Going forward, it said it is critical to watch the next steps of the central banks across the globe. Whether it will be a long pause, policy easing or tightening will largely depend on the prevailing macro economic factors.

But the dichotomy in the behavior of the short-end and the long-end of the curve is peculiar to the domestic markets, Emkay said, the inverted yield curve is a transient phase.

Yields to be elevated till policy stance modified

The brokerage believes yields may stay elevated till the policy stance is modified further during the course of the year, and also based on liquidity conditions. Late 2023 and early 2024 may see a moderation in money market yields.

The inflation in the US, as well as India, is moderating. What is to be seen is whether this trend is sustainable. The adverse impact of El Nino may push up prices, especially food prices. A reverse spike in the inflation data may delay the easing cycle and may force the US Fed to hike prices as the focus is clearly on controlling inflation.

Prices have started falling for most commodities,  including energy on the back of a sluggishness in growth.

 Global growth is expected to bottom out in 2023 at 2.8 per cent and rebound to 3 per cent in 2024. 

"Back in India, the monsoon worries due to the El Nino effect cannot be ignored. But the good part is the private capex that has started to look up and is positive for the economy. Though Indian markets continue to be fairly valued zone relative to global valuations, the FII are buying into Indian markets as it stands out strongly among growing economies," noted Emkay.

Why Indian markets are rising

Domestic investors too continue to pour money into Indian equities. Strong India growth can support higher valuations in the medium term. The corporate commentary/ tax collections and consumer data indicate good growth in FY24, said the brokerage. 

"The equity indexes have moved up in the aftermath of the pause in the rate hikes by the RBI and the US Fed. The pause has brought about some clarity with regard to the fund flows into the Indian markets. Not surprisingly the foreign investors have also come back into the markets in a regular and consistent way. The FPI flows have been to the tune of $5481 million in equities and $238 million in debt (both FYTD), and $2672 million in equities and $679 million in debt (both CYTD). This is a precursor to the gradually shifting winds. A continuation of this trend would give a boost to the markets and also supply liquidity to the domestic markets," the brokerage said.

Which sectors will outperform?

The brokerage expects manufacturing, technology, and banking & financial services to outperform. 

Banks: Most of the banks reported healthy earnings in Q4, accounted for mainly by strong credit growth. Healthy margins with improving asset quality have contributed to the performance. The PSU banks too clocked in one of the best quarters so far. The rate cycle has almost peaked, but a cycle reversal is important for the banks. In due course, it will help them improve their margins in the coming quarters.

Tech: After the selloff in tech, the sector has stabilized at lower levels. The peak index of 38,860 was reached on January 10, 2022, and the lowest level it touched in the last year was 26,676 on Apr 19, 2023. Currently, it is trading around the 29,000 level. There is strong support at 26,800  and the first target on the upside is 31,106, noted Emkay.

Manufacturing: The sector is undergoing fast-paced changes with a huge outlay of government capex of Rs 10 lakh crore, the incentives to local manufacturing under the PLI scheme, and the extraordinary expansion of manufacturing exports. Exports rose from US$ 290 billion in FY21 to 418 billion in FY22, which is a 40 per cent growth. The momentum will be kept up with the various programs mentioned earlier.