Mapping the market for Samvat 2080 amid wild swings and strong investor sentiment

This Samvat, the risk is from a mix of domestic and global factors—one is the outcome of the Indian general election in 2024 and the other is the escalation of the conflict in West Asia. Last Samvat, the risks were largely from global factors such as interest-rate hikes and the global economic slowdown.

At the threshold of Samvat 2080, let’s look at the year that was.

Samvat 2079 

The markets encountered mayhem early on in the year. There was a banking crisis in the US, which started with the collapse of Silicon Valley Bank, and then came the short-seller’s report on Adani and together they weighed the Nifty down to 17,000 in March.

Then the markets rallied all the way to 20,222 in September. Now, the Nifty trades 10 percent below that high and investors are showing some nervousness.

In 2023, even though the Nifty scaled an all-time high, it was outpaced by sectoral and mid- and small-cap indices. While the Nifty Midcap 100 grew by 23 percent, the Nifty Smallcap index advanced 30 percent.

Also Read: Diwali Picks | RIL, Canara Bank, Godrej Consumer among Kotak Securities top bets

The Nifty Realty had a stellar year with a 42 percent return despite high interest rates on home loans. Developers pushed out inventories much faster and unsold housing stock fell in tier-1 cities.

The Nifty Auto delivered a strong 26 percent return, bucking a four-year trend of underperformance against the benchmark. What helped were the cooling down of raw material prices and Indians upgrading to premium cars. Here, the story was more about higher average selling prices than driving penetration.

However, the Nifty Metal was a laggard with 6 percent growth. A slowdown in China, one of the largest consumers and producers of metals, contributed to the underperformance of the sector.

The Bank Nifty also had a poor year with a sub-5 percent return. The performance of heavyweights HDFC Bank, Kotak Mahindra and State Bank of India were a drag on the bank index.

Also Read: Think stocks, not sectors, in smallcaps, says ace investor Shankar Sharma

Dollar, T-bills

Meanwhile, a curious trend emerged. Though volatility indices remained low, the dollar index and the US 10-year T-bills were on the rise, with T-bills even hitting a 16-year high. The dollar and T-bills are where capital runs to when there is risk in sight.

But the CBOE VIX, a barometer of volatility based on the S&P 500, was fairly low compared to the peaks it hit during the Global Financial Crisis in 2008 and the pandemic in 2020. Ditto for local volatility indicator India VIX, based on the Nifty 50.

Perhaps investors remembered that volatility can build up quickly and sentiment does not take much time to change. During the market crashes following the 2008 crisis and the Covid-19-led lockdown, volatility spiked, reversing sentiment and exacerbating a market fall in less than a month.

Looking elsewhere to read market sentiment more clearly, FIIs returned in 2023.

That was because China had been losing investor confidence. As Avendus' Andrew Holland put it, China took a water pistol to its problems when it should have taken a bazooka. Brazil continues to deal with political instability. These worked to India’s advantage.

Towards the end of the Samvat, the sharp uptick in US treasury yields spoiled the party for Indian equities. Investors usually re-align allocation from other asset classes into US bonds, if the safest haven offers higher risk-free return.

Again, if we were to look at the silver lining, this helped to narrow India’s valuation differential (difference in P/E multiples) vis-à-vis other markets. So, when the interest rate cycle finally turns, India could see disproportionately higher FII inflows compared to other emerging markets.

Also read: Be overweight on largecaps, equal-weight midcaps and underweight smallcaps, says Kotak’s Nilesh Shah

Looking ahead

While there’s froth in the mid-cap and small-cap segments, the Nifty 50’s price-to-earnings ratio stands at 21.9, which analysts said is in line with historical averages.

According to Morgan Stanley, India's reform-oriented and macro-stable agenda strengthens its prospects for robust capital expenditure and profitability. Under this lens, some fund managers even believe that India is slightly cheap as FY25 and FY26 earnings estimates have been revised upwards.

Second-quarter results have been mixed, but growth is largely on track with private capex picking up.