Nilesh Shah of Kotak MF lines up 7 themes for every investor in 2024

The US Fed has skillfully balanced its monetary policy by raising interest rates to control inflation while avoiding rapid liquidity withdrawal, which helped reduce inflation without triggering a recession. Interest rates typically rise slowly but can be reduced swiftly if needed, as the Fed avoids drastic increases.

The US debt has reached record highs, raising concerns about debt refinancing. In relative terms, US equities are at their highest point in 50 years when compared to emerging market stocks.

Domestic Economy

As it has been described, India remained a bright spot in the global economic landscape through the year, making significant contributions to the global economic growth. The economy looks resilient, putting up a GDP growth upwards of 7 percent, surpassing global expectations. The year 2023 marks India's transition from a coach to an engine for global growth. Its robust activity level and capacity utilisation, buoyed by a recovered monsoon and strong Diwali sales, point towards a revitalised rural economy.

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The foundation for next leg of growth is likely to be triggered by capital, talent and infrastructure. The availability of capital is key to realising the country's economic potential. The success of Indian-origin CEOs in leading global corporations underscore the importance of nurturing and retaining talent within the country. Government spending on infrastructure is at an all-time high. This, coupled with the real estate sector's increasing contribution to GDP and record-high sales, augments economic growth.

Domestic Equity

India Inc is on a steady growth path. Revenue growth is moderate, but profit margins have expanded. This shows effective management and operational efficiency in companies. Volume growth is likely to pick up, firming up the financial health of these companies further.

The market cap-to-GDP ratio, which has now crossed into triple digits is above the historical average of 80 percent of GDP. When considering market valuations, large-cap stocks are trading close to their historical averages, while mid-cap stocks are at a marginal premium to their historical averages.

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Small-cap stocks, meanwhile, are trading at even a higher premium to their historical averages. It is better to maintain a neutral weight in equity, with a marginal overweight in large-caps, an equal weight in mid-caps and marginally underweight in small-caps.

Foreign portfolio investment (FPI) holdings in Indian equities are at a decade-low. However, there could be limited selling pressure from FPIs going forward, as they are unlikely to underweight a market like India. In fact, FPIs have turned net buyers, purchasing equities worth almost a billion dollars in November and the trend is likely to continue in December and well into the new year. The market has also put up a good safety net against foreign investor selling. Domestic institutions have the ammo to the tune of nearly Rs 400,000 crore ready to support the market.

Kotak Mutual Fund – Market Outlook 2024

We recommend to take profit in a rising market by cleaning up your portfolio in the rally. One should be ready for volatility and, hence, having allocation between debt, equity, real estate and commodity is extremely important. This is not the time to be leveraged in equity. This is the time to maintain a neutral allocation to equity and use any correction as an opportunity to enter. It is better to be marginal overweight on large-caps, equal weight on mid-caps and marginally underweight on small-caps.

Key Themes

1. Capex Cycle Revival: India is entering a significant multi-year capex (capital expenditure) cycle, marking a pivotal moment for economic growth. This cycle is at a decadal high, driven by increased public capital expenditure and all-time high capacity utilisation, hinting at a potential upturn in private capital expenditure. Additionally, companies are deleveraging. The expansion in the corporate order book across various sectors underscores the breadth and depth of this capex cycle. The number of projects has reached levels last seen in 2017, while the total project cost has surged from Rs 1,79,200 crore in 2017 to Rs 2,66,500 crore in 2023.

2. Focus on Defence, Railways & Infra: There is an increased focus on key government sectors such as defence, railways and infrastructure, which are crucial for India's long-term development. The Production Linked Incentive (PLI) scheme emphasises this focus by encouraging domestic manufacturing and augmenting sectoral growth. The budget allocation for central government capital expenditure (capex) has seen significant increases: a 29 percent rise for roads and bridges, a 26 percent increase for railways, and a 10 percent growth in defence.

3. Real Estate & Home Improvement: The real estate sector in India is showing signs of improvement. Factors such as increasing income levels and a stable affordability index, despite rising home prices, are positive indicators. This trend has led to a decrease in unsold inventory levels. However, rising inflation and interest rates could affect short-term momentum.

4. Penetrating Financial Services: The financial services sector is poised for growth, evident in robust loan and deposit expansion in the banking sector, showing a year-over-year growth of 12.7 percent and 15.9 percent. Mutual fund assets under management (AUM) have risen from Rs 39.5 trillion in October 2022 to Rs 47.8 trillion in October 2023. Demat accounts have surged from 3.6 crore in 2018 to 11 crore in 2023. In the insurance sector, private companies' new individual premium growth reached 24 percent in 2023, up from 22 percent a year back.

5: Rural Revival: The push for infra development and local manufacturing is set to directly benefit rural income levels, by way of roadway expansion and new manufacturing plants in rural locales. This infrastructure proliferation may create employment opportunities, thereby uplifting consumption. Farm incomes too have proven resilience, reinforcing a constructive rural economic outlook. Moreover, the lowering of MGNREGA work demand hints at stabilising rural labour dynamics. Together, these trends point to an encompassing revival across rural India.

6. Healthcare: Healthcare spending is set to increase with the rise in GDP. As the population ages, there's a global trend of increasing medical spending. India's healthcare expenditure, as a percentage of GDP, can be expected to grow, reflecting the growing healthcare needs of an aging population.

7. Capitalising on Global Supply Chain Shifts: The company sees a structural push to manufacturing coming from the China+1 strategy, and PLI schemes and the next decade may probably see the rise of India’s manufacturing sector, filling the missing piece in India’s growth puzzle. The country's favourable demographics and low labour costs make it an attractive manufacturing hub. India's increasing involvement in international trade and negotiations for significant trade agreements highlight its intent to integrate more deeply into the global economy.

Domestic Debt

The Indian bond market is gaining momentum, with expected FPI interest due to IGB's inclusion in the JPM Emerging Market Bond Index signalling confidence in the Indian Rupee and the Indian economy. Anticipated index flows might attract foreign investment and reduce the yield gap between US Treasuries and Indian Bonds. Given strong government tax collections, improved liquidity and inflation prints in aligning with RBI targets may possibly lead to rate cuts by the RBI to the tune of 50 bps following the US Fed's lead.

The Indian yield curve is currently the flattest it's been in a decade and its pricing in tight liquidity and end-of-rate hiking cycle. Bond yields are expected to stay range-bound in the first half of the year. In the second half after the elections, once there's more clarity on the Fed and inflation along with relatively easy liquidity on account of FPI bond purchases augur well for the bond markets. On the other hand, If the RBI starts cutting rates then yield curve could steepen. Given this backdrop and outlook ahead the 7-14-year segment appears attractive.

For investors, the debt market remains appealing, particularly for duration strategies. Categories like the dynamic bond fund, gilt fund, banking PSU fund and medium-term funds are worth considering, as they add duration to fixed income portfolios. Government fiscal policy and central bank actions, both in the US and India, will be crucial in determining interest rate movements and shape of yield curve going forward.

In Conclusion

Despite the global challenges, the Indian market offers stability to investors due to its large and diversified economy, robust domestic demand and ongoing economic reforms. While uncertainties and geo-political tensions pose challenges, the Indian economy’s resilience and potential for long-term growth makes it well-suited for investors looking for stability and growth.

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