Nifty, Sensex start new year in red, valuations stretched, vulnerable to corrections: Analysts

Valuations are a bit stretched and above the long-term averages. So, the market is vulnerable to corrections from presently unknown risks.

Indian equity markets kicked off trading in the new year on a negative note with a decline in the benchmark indices. At 9:16am, the Sensex was down 104.56 points or 0.14 percent at 72,136, and the Nifty was down 20.70 points or 0.10 percent at 21,711. About 1,783 shares advanced, 595 declined, and 170 traded unchanged.

The broader markets bucked the trend with the BSE Smallcap and BSE Midcap indices trading 0.46 percent and 0.30 percent higher.

Sectorally, Nifty Auto was in red as stocks saw selling ahead of monthly auto sales data. Nifty Bank, Nifty Metal and Nifty IT indices were also trading in the red. On the flip side, Nifty Energy, Nifty FMCG, Nifta Infra, Nifty Pharma, and Nifty PSU Bank indices were trading marginally higher.

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Analysts expect the Indian equities to witness consolidation for one or two sessions before the rally is resumed. "We expect the market to continue its ongoing positive momentum in the near term driven by healthy macros, strong FII inflows and positive global cues. This week is likely to be eventful as series of economic data globally are set to release. Auto is likely to remain in focus as OEMs will announce the sales number for December," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd.

According to VK Vijayakumar, chief investment strategist at Geojit Financial Services, as the new year begins, it is a Goldilocks scenario for the economy and the market. "The growth momentum in the economy is strong. A 7 percent GDP growth in FY24 is likely to be followed by around 6.7 percent growth in FY25 with decent corporate earnings growth. The banking system is in the pink of health and all macroeconomic indicators are stable. Political stability after the General elections looks almost certain," he said.

From the global perspective, the US economy appears to be heading for soft landing, according to Vijayakumar. The US 10-year bond yield at 3.87 percent and the dollar index at 100.6 are tailwinds for the market. FPI inflows in 2024 are likely to be robust, he said.

"The concern, however, is that most of this good news is in the price; valuations are a bit stretched and above the long-term averages. So, the market is vulnerable to corrections from presently unknown risks. The broader market is overvalued; safety is in large-caps," he added.

According to Sharekhan, year 2024 appears promising with the markets hitting a new high and economic growth being healthy, especially in the context of a slowdown globally.

Valuations look stretched in certain pockets, as reflected in the micro-cap rally and the euphoria in primary issues including the SME segment, according to the brokerage.

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"The Nifty trades at 23.4x the trailing 12-month price-earning (PE), which is not cheap but isn’t expensive either, especially given the expected earnings growth of 12-14 percent CAGR over the next two years," said Sharekhan.

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