The year of the bull or the bear? Or, really about those who can dare

Coming to mean reversion, small- and midcap stocks have had a dream run last year and a few pockets of excessive exuberance have built up. One should be mindful of these pockets

Long ago, a wise man said, while pessimists sound intelligent, optimists actually make money. In all my years in Indian equity markets, I've experienced this to be true—across the bull and bear phases.

What is also equally true is that in equity markets, stock prices invariably mean-revert.

Now this isn't a discourse on being equivocal and playing both sides. Rather, it is about an undertone of cautious optimism. The Indian economy is favourably poised this year as well. With industrials, power and the old economy forming the bedrock of capex revival, the newer sectors—EMS, new energy, defence, etc—are the added catalysts for economic development.

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This time around the environment, both from macro and micro standpoints, is favourable for private capex to pick up. The turning of the real estate cycle, which has a multiplier effect across the economic chain, shall work as a further boost. These sectors should continue to see interest this year and beyond.

I also get a sense that sector rotation in 2024 could play a part and the following sectors could outperform over the year:

IT: These companies have been plagued by weak execution. After the Covid, traditional cycles have got disrupted with different sectors moving in different speeds at different times. IT sector for e.g. has already faced a big slowdown in FY24.

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Thus, the scope for deterioration even if the US recession hits is likely to be lower compared to past. Also, attrition is moderating in the sector – which should cushion the earnings impact. Finally, in case of soft landing the large number of deals outstanding should result in strong revival in sector’s prospects.

Chemicals: Here as well just like IT, demand moderation has preceded actual recession. Further, we are already midway into the capex cycle for these companies and also they have been moving up the value chain resulting in much lower profitability impact compared to past.

A sector that still remains a favourite for us is:

Real Estate: Yes, it still makes sense after doubling last year. While, valuations are by no means as compelling as they were at the start of last year, this is one of the few spaces where growth concerns are limited owing to a consistent uptick in consumption across regions and also the consolidation that has happened in the sector. Further, real estate cycles are generally 6-7 years long – we are barely halfway in the cycle.

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Cement and telecom should continue with their stable run and I would stay constructive on select auto names (especially 2Ws), but performance should moderate in comparison to the stellar previous year that the sector has had.

Coming to mean reversion, SMIDs (small- and mid-cap stocks) have had a dream run last year and a few pockets of excessive exuberance have built up. One should be mindful of these pockets (equity markets have a ruthless way to reverse such excesses) while continuing to invest in bottom-up ideas in this space, wherein risk-reward is in your favour and upsides could still be more than reasonable.

An interesting snippet to keep in mind is that the market cap of midcap stocks (as per the SEBI definition of companies ranking from 101 to 250) now ranges from $2.6 billion to as high as $8 billion (and only going higher), a big change from couple of years ago where their market caps were generally smaller for mid caps (range was $2 billion to $5.5 billion), making a larger number of  them, more widely investible.

The big event of the year will of course be India's general election—whose outcome would be known only by end-May. That would dictate the Indian government's direction on the economy and capex. While consensus expects political continuity (and thereby stability), any upset thereof could spook Indian equity markets.

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Lastly, as globally interest rates appear to have peaked for now, FIIs are likely to stay positive on India. This coupled with continuing strong domestic flows should keep liquidity ample. Geopolitics—war escalation, crude flare-ups, US hard landing, etc—could pose a risk to Indian equity markets.

All in all, 2024 is a year of aligning micros to the overall reasonably favourable macros—a year of cautious bullishness—caution due to relatively high valuations and bullishness due to continued traction in growth.

On that note, wish you and your families a very happy and prosperous 2024!

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.