7 potential pitfalls investors should monitor in 2024

Rising crude oil prices, strained global supply chains and poor monsoon can push up inflation and cause a delay in reduction in interest rates

The Indian equity market is poised to end the year in the green for the eighth time in a row, and benchmark indices Sensex and Nifty 50 are heading into 2024 with a strong bullish undertone as the Indian market enjoys a 'goldilocks' moment. According to analysts, the estimated GDP growth of 7 percent for FY24, strong tax collection, interest rate cuts, and strong FII and DII flows are expected to support the market next year.

So, the upside potential is more than the downside risk. However, certain headwinds can rein in the bulls. Hear from experts, seven risks that investors need to keep a close watch on in the coming year.

1. Elections

Post the results of the recent state elections, investors appear to be confident that the current government at the centre will, in all possibility, retain power for the next five years. However, any surprise on this front could have a short-term impact on the markets. Analysts at Morgan Stanley believe that any surprise outcome may lead to about a 30 percent fall in the market.

The year 2024 is the election year for more than 40 countries, and the markets will be watching the outcome very curiously, particularly in the US and Taiwan. The re-election of the Democratic Progressive Party (DPP) of Taiwan, which leans towards Taiwanese independence may result in a higher probability of Washington going ahead with its plans to arm Taiwan against China.

It could also result in attempts by China to militarily control Taiwan. Russia’s invasion of Ukraine affected global prices of commodities, and if a similar situation breaks out in Taiwan, it would be of concern globally because of Taiwan’s dominant role as a global producer of semiconductors.

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Given the current geopolitical and social environment, the outcome of the election results and the policies will have a major directional impact on equity markets, said Chirag Muni, Associate Director, Anand Rathi Wealth Limited. Investors need to watch out for volatility in geopolitical and geoeconomic relations between major economies post-election outcomes as it could be a major concern.

2. Geopolitical risks

The unprecedented attack by Hamas on October 7, on Israel, has led to one of the worst crises in recent times, with Israel launching an all-out attack on Hamas, in the Gaza Strip. Up till now, the conflict has been restricted, but if it were to engulf other countries in the neighbourhood, it could have catastrophic repercussions on the supply chain and global trade, said Aamar Deo Singh, Sr. Vice President, Research, Angel One.

Apart from the Middle East turmoil, the ongoing Russia–Ukraine standoff, the Chinese-Taiwan conflict, and the crisis in the Bab-al-Mandeb Strait in the Red Sea can further jeopardise the world economy which could again impact the global supply chain as well as oil prices, warned Muni. And of course, throw global growth into a tailspin. If that were to happen, India would not be spared either even though the Indian economy is not impacted so much by global growth.

Global economic slowdown due to recession in some of the European economies is a particularly big risk. “With Europe being India’s top trading partner, the slowdown shall impact India’s exports,” Aamar Deo Singh told Moneycontrol.

3. US Fed

Fed Chair Jerome Powell has hinted at rate cuts in 2024 and investors are pinning their hopes for at least 3 quarter percentage rate cuts in the second half of the year. However, there is a threat of inflation resurging in the global economy led by the geo-political situation, which could derail the momentum.

Back in the 1970s, then Fed Chair, Arthur Burns, eased the monetary policy too quickly, leading to a resurgence of inflation which shows the inherent risk that inflation can revive, said Unmesh Sharma, Head of Institutional Equities at HDFC Securities.

“Such a scenario could lead to delayed and less extensive rate cuts than anticipated. This might trigger a return to a risk-off sentiment in the market as a result of which, emerging markets, including India, which are considered risk assets, may get negatively impacted due to potential outflows from foreign portfolio investors (FPI), Sharma told Moneycontrol.

Even if rates simply stay higher for longer, it could deter foreign investors from ploughing money back into India, impeding a sustained rise in stock prices.

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4. Energy prices

Overall, energy prices have been on a downward trajectory, with the Brent Crude and WTI down by 7 to 8 percent year-to-date (YTD), which has been a positive for the markets so far, as inflationary fears have receded to the background. The inability of OPEC (expand) to agree on output cuts, coupled with tepid demand, has kept prices in check.

“As long as crude oil prices trade in the $70-$90/barrel range, it’s more or less factored in by the markets,” said Amar Deo Singh of Angel One. Given that India's oil import dependency averages around 85 percent, sustained upward pressure on international crude oil prices can carry significant macroeconomic implications, and crude oil price volatility remains an intermittent spoiler for Indian equities, he said.

“Assuming India imports about 5 million bpd of oil, the full-year current account deficit will likely increase by approximately 20 basis points (bps). Consequently, CAD may increase to 1.8 percent of GDP if the Indian crude basket averages about $90 per barrel for the remainder of the year," CARE Ratings said.

5. Local inflation and interest rates

This being the election year, inflation will be a particularly touchy issue. “In India, the volatile food prices shall direct the RBI interest rate trajectory. Concerns of lower harvest due to uneven rainfall and lower rabi sowing may exert price pressure,” said Muni of Anand Rathi Wealth. This could pose a threat to corporate earnings growth, along with other global factors.

“Rising crude oil prices, strained global supply chains and poor monsoon can push up inflation and cause a delay in reduction in interest rates. It also pulls down the economic growth and corporate earnings growth as the purchasing power of households goes down,” said Shrey Jain, Founder and CEO, SAS Online.

6. The China factor

China being the world’s second-largest economy with a GDP of almost $19.7 trillion, investors must keenly watch the political and economic events unfolding in China. The potential risk of China's real estate crisis escalating may further derail the growth trajectory. China being the major consumer of raw materials, the slowdown shall impact world trade, Muni said. Plus, excess capacities in China could cause them to engage in dumping which could impact the earnings power of competing Indian companies.

On the flip side, if China can galvanise growth and get past the property crisis, there could be a bigger problem at hand for markets, says Andrew Holland, Executive Director & Group CFO of Avendus Capital Public Markets Alternate Strategies LLP.

"If China implements a significant stimulus plan that boosts confidence in its property sector, it could make the Chinese market highly appealing. In such a scenario, a considerable shift of investment flows from emerging markets, including India, towards China is likely due to its perceived value and attractiveness as a relatively inexpensive market," he said.

7. Higher valuations

Currently, Indian markets are at an all-time high and the valuations are above their historical averages. These valuations are supported by fundamentals and robust earnings in the current year. However, any earnings slowdown may prompt the FPIs to look towards other emerging markets with attractive valuations, and this may also lead to some profit booking by domestic investors as well, said Muni.

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Aside from these key risks, there are some other factors like the rising cost of borrowing to NBFCs, protectionist policies and sanctions that investors need to watch out for. RBI has announced tighter regulations for credit to NBFCs by banks. This is likely to increase the borrowing cost for NBFCs, impacting lending to some of the sectors thus impacting consumption.

With populist policies gaining traction, countries may impose further curbs on imports to protect domestic stakeholders that impact free trade. “Some technology transfers can be impacted or may be packed with some restrictions. This shall impact countries like India which is betting on transformation both in manufacturing and technological sectors,” said Muni.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.