Daily Voice | Sensex may soon hit 70k, but 75k hinges on earnings, macros and polls, says this equity head

The Nifty's current valuation stands at 19.3x FY25 EPS, slightly below its long-term average of 20x. The recent substantial electoral win by the BJP in three of the four major state elections has notably reduced election-related uncertainties. This victory, coupled with mounting expectations of an impending rate-cut cycle in the US, may help sustain the Indian market's favourable valuations.

We expect market sentiment to continue strengthening. Historical trends show that six months following the announcement of general election results (November to May) in previous instances (1999 to 2019), the Nifty has yielded positive returns ranging from 9 percent to 36 percent.

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Further India’s macro and micro fundamentals remain quite strong as indicated by the following factors:

1) Real GDP growth stood at an impressive 7.7 percent in 1H, driven by robust performances in the manufacturing and investment sectors. There's anticipation for the RBI to revise its FY24 growth estimate upward from 6.5 percent, buoyed by stronger-than-expected growth data.

2) Nifty has demonstrated a robust 1H earnings growth of 30 percent and is poised for a healthy 20 percent FY24.

3) Earnings momentum continues post Q2FY24, supported by encouraging high-frequency data points in October-November 2023 (such as GST collections, monthly auto numbers, power demand, and PMI data).

4) Favourable global macroeconomic conditions, with indications of rates reaching their peak, Brent crude maintaining stability around $80 per barrel, and steady bond yields.

The benchmark index achieved an all-time high closure at 69,381 following the government's significant victory in three out of four major states. Short-term market movements are unpredictable, but it's conceivable that the index might soon surpass the psychological threshold of 70,000. Further gains toward 75,000 would likely be propelled by strong demand, earnings growth, and macroeconomic factors, in addition to the outcome of the upcoming Lok Sabha elections and the current government's victory.

Is it time to add more exposure to the financial space?

The financial sector continues to trade at attractive/reasonable valuations relative to both historical benchmarks and future prospects. Notably, foreign portfolio investors (FPIs) are inclined towards investments in large-cap companies and financial institutions, favouring these due to factors related to liquidity and valuation.

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Conversely, mid-cap and small-cap investments are less favoured by FPIs for similar reasons. The financial industry, particularly within lending, has been in a sweet spot. Sustained credit momentum of around 15-16 percent, even on a higher base, showcases robust consumption and investment demands.

Banks and non-banking financial companies (NBFCs) have excelled across key metrics, demonstrating resilient margins despite rising funding costs and witnessing improved asset quality, resulting in minimal credit-related expenses. These factors collectively contribute to substantial earnings growth. Additionally, there remains room for stock prices to align with this growth trajectory, indicating potential upside.

On the non-lending front, asset management companies (AMC), depositories, and exchanges exhibit promising traction, propelled by the buoyant capital markets. We anticipate that the financial sector will outperform broader market indices due to its reasonable valuations and higher weightage (37 percent) in Nifty50.

Given the rising hopes for the continuation of economic policies after the recent state poll results, which are the stocks/sectors to bet on for 2024?

We anticipate a positive response from the Indian markets following the elections, particularly boosting stocks in the capital expenditure (capex), infrastructure, and public sector undertakings (PSU) sectors. Additionally, mega-cap stocks, which have previously lagged behind other large-caps, mid-caps, and small-caps, may now garner increased market interest, especially from foreign portfolio investors (FPIs). This renewed interest can be attributed to their attractive valuations and reduced concerns about an ambiguous outcome in the general elections.

Despite global macroeconomic challenges, the Indian economy has displayed remarkable resilience, primarily due to robust domestic demand. Sectors poised for growth include financials, automotive, capital goods/industrials, utilities, cement, healthcare, pharmaceuticals, and consumer discretionary, which are expected to benefit from this economic strength. Moreover, a significant takeaway from the elections is the expectation of reduced government handouts. Rural and agriculture-focused sectors could also present promising investment opportunities leading up to the elections.

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Do you see record FII flow in 2024 if the general election results will come as per market expectations?

As foreign institutional investors (FIIs) perceive stability in the Indian markets, increased capital flows are anticipated. The election outcomes also bode well for GDP growth, potentially leading to an upward revision. Mega-cap stocks, previously underperforming, might now attract greater attention from investors, particularly foreign portfolio investors (FPIs). Despite prior concerns about rich market valuations, FPIs are inclined to enter the market at current levels, especially considering the relative reasonableness of valuations in the mega-cap and large-cap sectors.

Consequently, record FII inflows are anticipated if the general election results align with market expectations, for a couple of reasons. First, the FII overall shareholding currently stands at approximately 16.5 percent, notably lower than historical levels of 23-24 percent. The recent dip in US treasury rates by approximately 50 basis points has triggered a reversal of capital outflows, evident in the shift from roughly Rs 39,000 crore outflow in September and October to about Rs 9,000 crore inflow in November.

Moreover, recent market activity shows a positive trend, with both FIIs and DIIs (domestic institutional investors) actively buying over the last five days, coinciding with short covering as the benchmark index sees an upturn. Second, FIIs are seeking stable macroeconomic policies and a consistent government to maximize potential benefits.

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Do you still see more value in PSU stocks, even though there has been so much run-up so far?

We foresee considerable potential for upward movement in specific public sector undertaking (PSU) stocks, given the robust momentum witnessed in the economy. Generally, PSUs have undergone significant enhancements, particularly in operational efficiency.

Additionally, segments outside lending, such as utilities, defence, and capital goods, have experienced an upswing in orders, robust execution, and enhanced working capital management, consequently driving substantial earnings growth. Despite a remarkable rally, valuations in the lending sector remain at an attractive ~30-40 percent discount compared to their private counterparts.

Are you betting big on infra companies?

From an economic perspective, the BJP's resounding victories reduce the likelihood of a shift towards populist policies, providing the political leverage necessary for sustained government expenditure on infrastructure. Infrastructure development remains a perennial narrative in our country's growth story.

Currently, we're witnessing significant traction in the infrastructure sector, particularly in roads, railways, ports, and power transmission lines. This momentum is primarily fuelled by substantial government investments in capital expenditure, enhancing revenue predictability for engineering, procurement, and construction (EPC) companies.

While many positives have already been factored into market expectations, we perceive a further upside potential, given the robust project pipeline evident across capital goods and infrastructure firms.

What do you expect from the Monetary Policy Committee meeting later this week?

We maintain the view that the Monetary Policy Committee (MPC) will likely maintain the current interest rates, retaining an unchanged policy stance. Our expectation is for rates to remain steady throughout FY24, possibly initiating a gradual rate reduction cycle starting from June 2024.

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