Projections for 2024: Here's why we need to be cautiously optimistic about the market this year

The year 2023 has been remarkable for the markets as most asset classes have performed very well, which reflected positively in investor portfolios. This was an eventful year for India as we celebrated many feats, like becoming the first country to land on the Moon's south polar region and hosting significant events like the G20 summit and the Cricket World Cup. India, the fifth-largest economy globally, was also projected to be the third-largest economy by 2030.

The new global powerhouse started becoming a critical part of the asset allocation strategies of international investors. For instance, Morgan Stanley upgraded India to overweight, ranking from #6 in the last review to #1 in their latest APxJ/EM reallocation model.

Globally, there was stress throughout the year on account of some significant events like the banking crisis in the US, the emergency takeover of Credit Suisse by UBS, continuation of the Ukraine war, the outbreak of the  Israel-Hamas war, the reopening of China this year after three long years of zero-Covid policy and its economic woes along with a high inflation and hawkish stance by central banks across the world.

These continued to stress global growth as the major economies were already under recessionary worries. As for India, despite the global woes, it continued in its march forward as the fastest-growing economy in the world, giving confidence to investors that its long-term story remains intact.

Asset Class Performance during 2023

If we look at the performance track record of the different asset classes in the last year (2023 YTD, as of 30th Nov,23) then Indian equities have been the best performers, and here the biggest rally was witnessed in the mid and small-caps. Specifically, BSE Midcap and BSE Smallcap were up by 35% and 39.6% respectively.

The fixed income segment's performance was also better compared to the last two years when there was a slowdown in this segment. This can be seen from the fact that the CRISIL Short Term Index and CRISIL Combex Index rose by 6.6% and 6%, respectively, while in 2021 and 2022, their gains were in the range of 2.5% to 4%.

Regarding alternatives, the MSCI AC World Index was the best performer as it appreciated by 15%, while the MSCI EM Index was up by only 3%. On the other hand, USD /INR performance has been reasonable as it witnessed a growth of 0.8%, while gold has done reasonably well as it rose by 11.6%. The only underperformer has been Brent Crude, which fell over 3% during the year, and as oil prices continue to fall, this will adversely impact the performance of this.

Our Market Outlook for 2024

We are cautiously optimistic when it comes to our outlook for 2024. Investors will closely watch three significant events in the coming year: the US elections, general elections in India, and the direction of interest rates globally. While the US election is looking slightly tight, the results of the recent four state elections in India indicate a high probability that the same leadership team will return to power in 2024. As far as India is concerned, there are tailwinds like stable macroeconomic trends, healthy earnings of India Inc., and the robust liquidity provided by domestic flows and FIIs, making it a market hard to ignore for institutional investors.

The global economies continue to face many headwinds, which are still not behind us. The three major economies, the US, Europe, and China, are facing a slowdown, and any big surprises from these economies next year will adversely impact the performance of our markets. India is expected to be the third-largest economy in the next five years, so it will be a market that institutional investors cannot ignore. This also means that the allocation to India will go up in the reallocation models of global investors.

Our views on the different asset classes are summarized below:

Equities

We have a positive outlook on equities not from a one-year point of view but from a three to five-year perspective. A fall in interest rates will improve companies' profitability and this will have a positive impact on equity markets. Also, if interest rates come down globally, the share of allocation towards emerging markets and the growth capital will go up from the institutional investors. In such a scenario, India will get a reasonably good share of this allocation, which will help the domestic markets further. 

The massive rally in mid-cap and small-cap portfolios in 2023 leads investors to want to increase their equity exposure and move more towards mid- and small-cap funds. As per our analysis, Mid-cap and small-cap indices, relative to the large-cap index, are trading at above/near two standard deviations, which means that the valuation is stretched compared to the large caps.

In this scenario, our discipline suggests that we should reduce equity and, within this segment, reduce more from mid and small-caps because of the concerns on valuation and their recent performance. We continue to stick to our call to book profits to the extent your asset allocation and valuation permits and then re-enter systematically or on every dip in case you are under-consuming equities right now.

Unlisted Space

We are also positive on the unlisted space because there has been some correction, either in the form of time correction or price correction, and hence, this is an excellent time to look at this asset class to build up the portfolios.

Real Estate

On the real estate front, specific segments have seen a considerable capital appreciation, especially the luxury segment, while there has been a massive appreciation in residential prices in some parts of the country. For instance, Camellias by DLF in Gurgaon's Golf Course Road recently sold for INR 100 crore. At this juncture, it is tough to say whether this trend will continue, but generally, when there is a positive correlation between real estate and equity markets, businesses do well, as the equity segment is positive.

In the last 12 to 24 months, many UHNIs have unlocked their values in businesses and invested in luxurious properties. The considerable liquidity they create leads to more demand for luxury properties, and here, their preference is more towards weekend houses, big villas, farmhouses, or bigger apartments. This has also led to a massive jump in the prices of these apartments in the luxury segment.

In short, we are optimistic about 2024, and here we are confident about the fixed income segment while cautiously optimistic about the equities, especially from the 3 to 5-year perspective. We are optimistic on the unlisted side with a 5 to 7-year view while neutral on the real estate segment. As for the international portfolios, we are looking at including the same in our client portfolios as we look at them more from a diversification view than from the returns perspective.

We see more value in specific emerging Markets, which could become a part of our portfolios from a five to seven-year perspective. Building up our client portfolios based on these views will create a decent return for them in the long term.

Views are personal. The author is Co-founder, Client Associates

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