10% stock market correction in 2024? 90% probability but imminent crash unlikely, says Investec

Investec in its latest India strategy note said the probability of a correction (10 per cent drawdown) for domestic stocks is high in 2024, especially after the outperformance of large cap (23 per cent) and midcap (58 per cent) indices over the past year. The probability, it said, is close to 90 per cent!

Investec, however, does not see an imminent crash of over 25 per cent decline, as India's valuation is not excessive and historical imbalances have corrected. While external factors and geopolitics remain risks, Indian market's vulnerability today is lower than in the past, Investec said in a strategy note.

"On the macro front, India is likely to structurally resolve its chronic CAD, which will aid the investment cycle as household savings also increases. Our optimism on the private CAPEX cycle is also predicated on a solid increase in corporate profitability - has increased 2.5 times to Rs 10 lakh crore between FY20-FY23. We continue to remain overweight on Industrials, Autos, Financials and Pharma," it said on February 6.

The foreign brokerage prefers stocks such as ICICI Bank Ltd , Kotak Mahindra Bank Ltd, Bajaj Auto Ltd and Cipla Ltd in large cap, and Delhivery Ltd, Equitas, Angel One Ltd, PB Fintech Ltd, Exide Industries Ltd, and Petronet LNG Ltd in the mid and small cap space.

Investec said the instinctive reaction of an investor after a strong performance is to reassess and look for signs of a correction and crash. "The probability of a correction (over 10 per cent decline) in any single year is high – in the past 33 years, Nifty has corrected more than 10 per cent in 29 years (a probability of 88 per cent). However, a correction of more than 20 per cent while frequent in 2000s, has already become rare – since 2010, this has happened only once in 2020," it noted.

Investec noted that the only market crashes of over 30 per cent decline in the 21st century have their origin outside India – 2008 (GFC), and 2020 (Covid-19).

"These crashes (2008 & 2020) are typically the result of a major imbalance accompanied by a massive inflation in valuation. Both those conditions are largely absent today in India, although we remain exposed to external shocks," it noted.

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