After the valuation enrichment rally in 2023, large-cap stocks are better priced on the risk-reward front. A steady comeback of foreign institutional investor ( FII) flows could support the segment while mid and small-cap stocks could go through higher volatility, and one should be selective within them, said wealth management company LGT Wealth India in its annual outlook report for 2024.
LGT Wealth expects flows (both FII & DII) to surprise positively in 2024, which is likely to support markets in conditions of excessive volatility and keep them on the shallower side. “Decadal low FII ownership in a globally peaked out interest rate scenario and ever-increasing domestic SIP flows provide us comfort for the same,” said Rajesh Cheruvu, Managing Director and Chief Investment Officer, LGT Wealth India.
Globally, interest rates have likely peaked and inflation is cooling. Cheruvu expects investment-led policymaking to continue, which shall augur well for capital goods, cement, materials, etc.
With India’s domestic macro trending strongly across the corporate and retail segments, corporate earnings are expected to stay healthy, added Cheruvu.
“Although India’s market has rallied sharply across the board, the valuations at the benchmark level are just slightly higher than its historical average, with a TTM PE of 23x. However, the mid and small-cap valuations appear stretched. On a TTM basis, the Nifty Midcap 100 trades at a PE of ~25x, and the Nifty Small Cap 100 at a PE of ~29x. The scope of re-rating in broader markets seems limited, and one shall be selective considering their sustainable growth–valuation matrix. Similarly, valuations trade at a premium if we think of other parameters. India’s market.cap to GDP for BSE listed stocks has crossed the $4 trillion mark and is at 120%+ of GDP
(decadal high) vs a long-term average of ~84%. The one-year forward Earnings yield to 10-year Bond yield ratio dropped below 0.7 vs the 10-year average of 0.8. Globally, the US trades at a premium to its historical average. In contrast, most European nations and emerging markets trade at a discount,” said the report.
LGT Wealth expects a 12-15 per cent return from the market in calendar year 2024.
Outlook on key sectors:
Banking & NBFCs
Credit growth is on the rise and likely to continue in 2024 with the ongoing investment-led demand followed by increasing access to consumer credit. It is one of the select sectors wherein several stocks trade at a discount to their historical averages while their RoA is at a decadal high and is delivering healthy financial performance. “Risk-reward seems most favourable here,” said Cheruvu.
Information Technology
The global economy has averted recession, and interest rates are at a multi-decade high, impacting the discretionary IT spending by most customer segments. Deal wins have been in the slow lane, and most of the decisions are postponed by clients. However, changing the interest rate outlook in 2024 could help revive demand and execution later in the year.
Health Care
Without significant catalysts like off patents, ‘at-risk’ or FTF opportunities, the pharma players will focus on volume growth and therapeutic focus. Services like diagnostics and hospitals will likely offer investment opportunities
with increasing health consciousness, affordability and access to services backed by insurance coverage.
Consumer segments
Steady commodity prices combined with healthy urban demand have supported volumes so far. Expectations of rural recovery in 2024 are likely to augment the performance of staple companies well. “On the discretionary side, strong momentum is expected to be maintained, but valuations appear rich for now. Most of the QSR companies are expanding, focusing on structural consumption shifts,” noted the report.
Automobiles
Commodity costs could soften, which shall aid margin and profitability. Launching new models and restrictions on using older models in specific cities to curtail emissions could help sustain volume growth. EV theme to be closely watched. Similarly, companies that benefit or support through the EV theme shall be preferred among ancillary companies, added the report.
Industrials & Capital Goods
With expectations of political stability, defence and capex stories are likely to deliver strong earnings growth. “Ahead of the elections, there might be a slowdown in new project awards by the government. At the same time, it could restore momentum in the quarter of the calendar year post-elections. However, private capex is likely to progress, with capacity utilisations above historical averages combined with healthy demand and growth outlook,” said Cheruvu.
Materials – Building Materials
This segment is a second-order beneficiary from the ongoing infrastructure development, industrial capex and real estate revival. Valuations are rich, and LGT Wealth expects to see near-term underperformance. While the medium outlook continues to be healthy, volatile times are an opportune time to build positions, it said.
