 "Nifty 50, market, sensex")
Brokerage Emkay Institutional Equities expects the Nifty to scale up to 24,000 this year, registering a return of 11 per cent by December 2024. It expects small and mid-caps to continue to outperform, with better earnings growth and momentum in return ratios.
Emkay's model portfolio focuses on large-/mid-caps and it is underweight on Financials and overweight on Consumer Discretionary. Its contrarian call is that the underperformance of financials will continue through 2024. Both
cyclical and structural factors will be at play. "The argument is counter-intuitive because the Indian banking system is at its healthiest in decades, but we believe valuations also capture that," the brokerage said in a note.
Banks would face immediate short-term pressure in the early part of the monetary easing cycle, as per the brokerage.
Emkay Model Portfolio
Emkay Model Portfolio
"External-benchmarked mortgages would reprice downwards almost immediately, followed by short-term corporate loans. Most large-cap banks are expected to show slower earnings growth in FY25 than the preceding years which would be a drag on the stocks. The reverse of the 2-3Q FY23 story would play out, with bank margins falling sharply and stocks underperforming," said Seshadri Sen, Head of Research & Strategist, Emkay Global Financial Services.
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Key themes for 2024 are rate cuts, the budget and reform, and probable revival in mass segment spending.
" We believe the Fed would cut in 3QCY24 and RBI would follow suit almost immediately. This would drive a re-rating in the markets which would be visible more in small and mid-caps than the Nifty. A BJP win in the Apr-May national elections is almost a done deal and focus is on the FY25 budget, with manufacturing and infrastructure the key themes. We also see possibility of a recovery in mass spending. This is not certain, but we think it is worth taking some exposure to play this," said Seshadri Sen of Emkay.
Sen believes banks are vulnerable because of margin pressures after the RBI rate-cuts, but this could be offset by manufacturing margins if commodity prices stay soft.
"FY26 forecasts are at 13.7%, which we think is a little vulnerable – some sectors may see cyclical downturns by then and commodities are unpredictable that far out. A notable feature is that ROEs are expected to stay robust through this cycle. Market valuations are reasonable at more than 0.5x the historic mean, and we see risk once it touches +1SD; small and mid-cap valuations are ruling above the Nifty, a a trend we believe will persist," said Chinmay Kabra of Emkay.
4 reasons why the brokerage is bullish on the market
1. Rate Cycle
Rate cuts will dominate the agenda for calendar year 2024 as the US Fed is expected to start easing in the third quarter of this year with measured cuts. That would be the cue for the RBI to also start cutting interest rates in the domestic markets. The most visible impact would be to spur FPI flows.
"We believe this would give fillip to valuations in growth stocks, especially in the sectors (like manufacturing and some premium consumer categories) that are seeing macro tailwinds. The biggest positive of a rate cut would be the impact on foreign portfolio flows. FPI flows are anyway expected to be strong in 2024, with the debt market set to see passive inflows of $25-30 billion from inclusion in the JP Morgan bond index. Rate cuts would spur flows into equities too. India is also helped by investors’ China-aversion – the market entails an enhanced share of emerging market allocations," said Sen.
Thr brokerage believes that FY25 equity inflows would exceed the $36.7 billion inflows of FY21, given that the larger market-cap base has improved India's absorptive capabilities; and India is set to garner a larger share of risk-off emerging market flows, triggered by Fed rate-cuts, given China's inability to attract flows.
2. FY24 Budget and reforms
The FY24 Budget, to be presented in July 2024 will be a major marker for the markets. The key issues to focus on:
Infra and manufacturing. Sen believe that the two key areas would be manufacturing and infrastructure. "The third-time victor Modi government would continue to focus on the infrastructure push, given the evidence of multiplier effects. Much of this would be a continuation of existing projects like power reform, piped water rollout and transport (roads and rail). On manufacturing, the policy push towards further encouragement of manufacturing would continue, with new categories probably being explored," he said.
3. Tax reforms: Emkay is also hopeful that the government will push further towards a simplified tax regime with the probable abolition of tax exemptions. This would create volatility in life insurance stocks, as there are still a large number of tax exemptions that support this industry.
4. Recovery in mass spending
The mass/rural segment has underperformed on growth, post-Covid. This is reflected in the performance of consumer stocks, with companies catering to premium segments having relatively outperformed. The national elections, due in Apr-May 2024, are usually a stimulus for the mass economy.
"The BJP’s victory in the November state elections obviates the need for a dramatic increase in social spending, but we expect a small jump nevertheless. Also, many state governments have upped their budgets on social spending (Madhya Pradesh being a case in point). Finally, the campaigns themselves involve an extensive transfer of resources to the bottom of the pyramid. Some sources of the rural/mass distress are slowly losing steam. Inflation is gradually
receding, with CPI off its highs. Also, as we move further away from Covid-19, the indebtedness levels should come down (hard to measure). There has been a recovery in entry-level two-wheeler sales in the last few months. There is a base effect there, but this is the first sign of an uptick after 6-7 years," said Sen.
Market view:
"“With index setting at long-term mean valuations, we expect 11% return for the Nifty in 2024. The current composition of the Nifty is predominantly defensive. The India story is largely a capex-driven, industrials-led earnings bounce-back. The Nifty, on the other hand, is largely driven by consumption and, to some extent, tech. There is a growing divergence between Nifty and NSE500 weights. So, while the economy and broader markets would still rule at high valuations in Dec-24, such optimism may not reflect in the broader Nifty. Manufacturing and infrastructure are expected to gain prominence as prime themes in the year 2024m," said Sen.
Bond rally only at the short end
The fall in rates is likely to be restricted to the short end of the curve. The 10-year yield is at one of its lowest points relative to the repo rate, having rallied sharply in CY23. This leaves little room for further upside in the 10-year yield. The short-end yields, however, falling by 50-75bps, depending on how accommodative the RBI turns.
