The equity market is unlikely to keep up the euphoria of 2023 through the next two years, predicted Kenneth Andrade, chief investment officer at Old Bridge Capital. Returns are expected to moderate over 2024 and 2025, as the stellar yields of this year have stretched valuations across the market, according to him.
The sharp rally in 2023 has taken the market capitalisation-to-GDP ratio to a historical high of over 100 percent. "Whenever such instances have happened, the market has corrected quite significantly," Andrade said. However, unlike earlier, this time he didn't predict a correction, but only a moderation in returns.
The NSE Nifty 50 has surged over 17 percent this year to over 21,500 points from 18,200 points at the beginning of the year. The BSE Sensex has jumped about 17 percent to a shade below 72,000 points. Broader markets have rallied, too, with the NSE Midcap 100 index rising 44 percent and the NSE Smallcap 100 index 53 percent.
Recess in stocks on a rally
Andrade highlighted the market shift that took place through 2023. "In the first three months of 2023, about 700 stocks were at their 52-week lows, however, by the end of the same year, we now have around 500 stocks scaling 52-week highs, all within nine months," he said.
Going ahead, these winning stocks may go through a time-wise correction, not participating in the up-move as has been the case in all the previous cyclical shifts. "This is what will trigger a moderation in market returns over the next couple of years."
Better cash position to fuel capex
Andrade also points at a key difference in the balance sheets of NSE 500 companies this time around. Previous cases of a surge in capitalisation-to-GDP saw most NSE 500 companies operating at near full capacity, which drove cash flows. That in turn helped reduce debt. But this time, the capacity utilisation sits near 80 percent.
"We still have over 20 percent capacity to go and, by the time we exhaust that, we'll be headed towards historically high cash available with companies. When that happens, we will also likely see the largest capital expenditure cycles that we've ever seen in India," Andrade said.
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"That's what we think will be the biggest thematic that plays out between now and 2030," he said. Several sectors, including cement, specialty chemicals, paints and capital goods have hopped on to their respective capex cycles.
Watch largecaps to outperform
With the capex cycle kicking in, Andrade also expects earnings growth for the Nifty 50 to remain around 12-15 percent for the next couple of years. For the broader market, however, earnings growth may be faster, but he feels that their stock prices have factored in that superior growth.
Aligning with the larger consensus, Andrade also believes that it will be the largecaps that will do reasonably better in 2024. "The market environment at this point is such that you have small companies do reasonably well as there has been a big valuation arbitrage between largecaps and midcaps. So, I think 2024 will be a year when largecaps will do well as they will play a catch-up on the valuation front, which is not to say they are very cheap either," Andrade said.
"Also it is worth noting that these are not businesses that will give you 2x or 3x returns, but they will safely protect your capital and give you incremental returns," he added.
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