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Expert View: As we draw curtains on FY24, Kunal Vora, Head of India Equity Research, BNP Paribas speaking on the market outlook said that Domestic flows have become the bedrock of Indian Equities. However, valuations are looking expensive for the market as a whole and most of the key sectors. Bond-earnings yield gap is elevated which he sees as a cautious indicator. The December 2025 Nifty-50 target of 23,500, implies a 6-7% return. Vora expects rate cuts in the US starting June’2024 and said that despite corrections risk-rewards still remain unfavorable for mid and smaall caps. Edited Excerpt
What direction the markets are likely to take in FY25? What will be the triggers on the upside and downside
Our view highlighted in our 2024 outlook, ‘The pricey paradise’ remains unchanged. India is in a sweet spot with strong GDP growth, resilient earnings, fiscal discipline, large forex reserves, and moderate inflation. Post the state elections market is pricing in political stability. Domestic flows have become the bedrock of Indian Equities. However, valuations are looking expensive for the market as a whole and most of the key sectors. Bond-earnings yield gap is elevated which we see as a cautious indicator. Our December 2025 Nifty-50 target 23,500, implies a 6-7% return.
The downside risk could be from a resurgence in inflation as some of the commodities have started inching up. Continued weakness in mass consumption remains a concern. Large stake sale by the promoters is a negative indicator for the market. Upside risk could come from larger-than-expected rate cuts by the FED, moderation in domestic bond yields and continued strong local flows accompanied by a resurgence in FPI inflows post elections.
Also Read- Expert view: Corporate earnings growth, geopolitical stability key triggers for FY25, says Niraj Kumar
After the US Fed left interest rates unchanged, by when do you see interest rate cuts taking place?
Fed officials signaled a dovish reaction at the March FOMC, sticking with a median projection of three rate cuts this year despite higher growth and inflation forecasts, which makes our economist team more confident of the first rate cut to come in June 2024. FED’s stance of maintaining three rate cuts for this year was cheered by the bond as well as the equity market and in our view, any delays might sour investor sentiments.
In view of corrections taking place in Mid and small caps, what should be the approach of investors?
In our 2024 outlook, we mentioned that we expect single-digit returns for Nifty-50 and for mid and small caps to underperform large caps. Mid and Small cap valuations have expanded led by strong domestic flows. Monthly SIP flows have increased from ~ ₹8,000 crore per month in 2020 to ₹9000 crore plus in February 2024 and we have seen an increased allocation towards mid and small cap funds compared to large caps. Direct retail activity is also higher in mid and small caps. These strong flows have resulted in their significant outperformance and this has reduced the valuation comfort. While there has been a correction from the peak, we believe the risk-reward is still unfavorable and would stick with large caps.
Also Read- FY24 market review: 120 stocks from Nifty 500 gave multibagger returns, 55 in the red; check list of top gainers, losers
Amidst volatility in the markets which sectors or stocks should investors consider and which are to be avoided
Our preferred themes for 2024 are ‘growth at a reasonable valuation’ and ‘affluent consumption over mass’. We like private sector banks which is the only large sector that is trading at a discount compared to its last decade average despite strong fundamentals. We believe the worst is behind for the IT services companies and prefer them over consumer staples. We believe the telecom sector is well poised with an impending tariff hike and moderation in capex. We also like the logistics space. In consumption, we like business that are catering to the relatively affluent households which includes themes such as travel, real estate, jewelry, and healthcare. We have a negative view on consumer staples, pharmaceuticals, and two-wheelers.
How are Indian market valuations vis-à-vis other emerging markets
Nifty-50 is currently trading at around 20 times on a 1-year forward basis and it trades 70% premium over emerging markets and 60% premium over Asia ex-Japan. India has historically traded at a premium compared to emerging markets and Asian peers, but the premium has extended in recent years.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions
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Published: 29 Mar 2024, 01:09 PM IST
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