Brace for correction in 2024; avoid stocks with questionable fundamentals, bet on these themes

In an expansionary phase, such as the one currently going on, interim volatility is an opportunity to build on to equity allocation

After a stellar 2023, wherein both the Nifty and Sensex gained 20 percent, Indian equity markets have begun 2024 on a tepid note amid increased volatility. The volatility index VIX surged to 14.5 on January 1, indicating high volatility is around the corner.

Analysts believe that at higher VIX levels, there can be bouts of big selling. However, in the long term, India’s outperformance is forecast to continue due to a healthy domestic economic and political structure, said Vinod Nair, Head of Research at Geojit Financial Services.

Several market experts Moneycontrol spoke to outlined key risks that investors need to watch for in 2024. India’s pre-election rally, they noted, might be impacted by an overheated market and potential food inflation due to El Nino's effects.

Investors must also brace for some consolidation. “We are in the midst of price-wise correction, with many stock adjustments after the recent rally, and hence, it is advisable to have a pragmatic view with a one-step approach,” said Osho Krishan, Senior Analyst, Technical & Derivative Research, AngelOne.

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Market outlook

All these risks could impact the performance of Indian markets. However, the outperformance is forecast to continue due to a healthy domestic eco-political structure. “We expect a modest return of 10 to 12 percent in CY24 on the main market. It is advisable to diversify the investment pattern to multi-asset,” said Nair.

“It is suitable to be diverse when equities are trading above the long-term average for a prolonged period,” he told Moneycontrol, adding that economic growth and interest rates are stable, generating decent returns in other assets such as debt, real estate, and commodities.

Kedar Kadam, Director, Listed Investments, Waterfield Advisors, expects India’s resilient economic performance to continue well into 2024, driven by the nation’s large and growing market size, a young workforce, and a committed policy emphasis on education reforms, upskilling, manufacturing, tech-enabled governance, infrastructure development, and improved regional connectivity.

“As we approach the 2024 general elections, we expect consumption growth to be driven by subsidies and transfer payments. Post elections, although the government capex is expected to moderate, we expect private capex to pick up further,” Kadam said.

What should investors focus on?

Geojit presumes CY24 to be a year of reversal, sector and category wise. “We like large caps compared to mid and small caps. Generally, it will be a stock and sector-specific year. Sectors we like are Banks, Manufacturing, Pharma, Chemical and IT,” said Nair. He added that a correction in the consumer sector should be capitalised in CY24.

Investors should steer clear of stocks with questionable fundamentals as these tend to fall more compared to those with strong fundamentals, when markets turn volatile.

“Accumulating stocks of fundamentally strong large and mid-cap companies with pricing power and strong balance sheets can help investors weather … any storm. Traders need to stick to stop loss. In an expansionary phase, such as the one we are in, interim volatility is an opportunity to build on to equity allocation,” said Shrey Jain of SAS Online.

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Investment strategy for 2024

According to Chirag Muni, Associate Director, Anand Rathi Wealth Limited, investors should stick to asset allocation. “Choose the right asset classes and stick to them. Rebalance as and when required as per your asset allocation strategy. Depending on risk profile and time horizon, 50 to 70 percent equity and balance in debt should be considered, he told Moneycontrol.

Investors should continue their SIPs irrespective of market level, and hold on to their current investments, and not jump into panic selling in case they see a 5-10 percent correction. Invest across market caps for balanced returns, Muni added.

Ideal asset allocation for 2024, according to Chirag Muni, Associate Director, Anand Rathi Wealth Limited, is Large-cap: 50 percent; Mid-cap: 20 percent; Small-cap: 30 percent.

That said, here are key risks that can hurt investor returns in 2024:

Premium valuations: The Indian market is trading at a one-year forward P/E of 20x, above the long-term average. The current rally in Q4 CY23 has been elevated, and this may impact the pre-election rally of H1 CY24, Nair told Moneycontrol.

High Inflation, Rate cuts: High food inflation linked to El Nino poses a significant risk. In India. Inflation is expected to stay above the long-term average, limiting the extent of rate cuts.

Geopolitical risks: The Russia-Ukraine, Israel-Hamas wars, and recent attacks on ships in the Red Sea may lead to an uptick in freight costs, supply issues and oil prices, dampening investor sentiments.

Bond yields: Yields have contracted drastically in Q4, which may factor in more than warranted in the short to medium term. “Hence, the market may face a reverse supply in CY24, having a negative effect on India,” Nair told Moneycontrol.

Also Read | 2024 outlook: China recovery, Indian elections and Fed moves to impact Asian markets

Slowdown, uncertainty: Currency fluctuations, policy shifts, global political uncertainties, and the upcoming elections pose significant risks in 2024. Slowing major economies may impact Indian markets, while volatile commodity prices, particularly of crude oil, could disrupt market
sentiment, according to Palka Arora Chopra, Director, Master Capital Services Ltd.

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.