Market in 2024: 3 important triggers that could drive equities this year and what investors should do

In 2023, the domestic equity market demonstrated a remarkable performance, reminiscent of the bullish trend observed in 2017. Both the Nifty 50 and the Sensex exhibited substantial gains, climbing around 20 percent. However, what truly stood out were the midcap and smallcap segments, outpacing the benchmarks by a considerable margin.

The BSE Midcap index witnessed an outstanding surge of 46 percent, underscoring the robust performance of mid sized companies. Similarly, the small cap index displayed an even more impressive uptrend, recording a remarkable 48 percent increase. This robust performance in the mid cap and small cap indices suggests a broader market participation, with investors showing confidence not only in large cap stocks but also in the growth potential of smaller companies.

"2023 defied the consensus view of moderate equity returns given the background of rising global interest rates, limited scope for valuation expansion and elevated crude prices amid geo political tensions. Returns in large and mid cap indices were majorly driven by earnings growth with a flattish earnings multiple.

This is indicative of the strengthening of the earnings upcycle which commenced in FY22," said Quantum AMC in an note. These positive trends in the equity market indicate a favorable economic environment and investor sentiment, likely driven by factors such as strong corporate earnings, economic recovery, and supportive government policies.

As always, it's essential for investors to stay vigilant and monitor market dynamics for informed decision making in the ever evolving financial landscape. Going ahead, investors are stepping into 2024 with optimism, buoyed by prospects of potential rate cuts, robust economic expansion, and anticipated political stability post the Lok Sabha elections.

These factors collectively bode well for the equity market outlook. As per the investment firm, the key triggers to deciding market direction in 2024 are: : Demand in the mass market and rural segments has remained muted since the pandemic due to inflationary pressures. Moderation in inflation could support a recovery in the mass market segment, further strengthening the ongoing economic upcycle, said the brokerage.

While the earnings growth in recent quarters was driven by margin expansion, volume growth driven by broad based demand could support earnings growth in 2024, it noted, further adding that volume recovery in rural focused two wheeler sales indicates green shoots in rural consumption. : According to Quantum, most of the recent capex was driven by the government sector.

As per the RBI survey, capacity utilisation in the manufacturing sector is near a healthy level of 74 75 percent. A buoyant demand environment along with a pickup in utilisation could strengthen the private capex trajectory, stated the brokerage, pointing out that private capex is showing early signs of revival.

: While DII flows have been robust for the past few years, rising global interest rates have kept FPI flows under check. DIIs have invested $20.2 billion in 2023 on top of $35.8 billion in 2022. FPI flows have been tepid at $12.8 billion this year, but better than the outflow of $16.5 billion in 2022.

This has resulted in decadal low FPI ownership in Indian equities. As global inflation and interest rates moderate, India’s stable policy environment and resilient economy could attract meaningful foreign flows, stated the brokerage. Segments that could drive markets in 2024: According to Quantum, investors need to be selective as most sectors have seen a favourable earnings cycle along with stellar returns.

"The trajectory of consensus earnings estimates of a sector along with recent return profile can provide insights to identify the next set of market drivers. Two promising sectors which have delivered relatively muted returns along with a potential improvement in earnings trajectory are Banks and IT.

A favourable credit cycle coupled with a revival in corporate credit offtake can drive the earnings of banks. A likely soft landing in the US can trigger a faster conversion of deal wins to revenue in the IT sector. Apart from fundamental reasons, these two sectors could be major beneficiaries of a reversal in FPI flows," explained the brokerage.

It further highlighted that small and mid cap stocks have recorded relatively better returns compared to their earnings growth. Apart from normalisation in earnings, higher flows into these categories have contributed to the superior returns in the segment, it noted. The cumulative share of flows into small and mid cap categories over the past 3 years stands at 28.3 percent vs AUM share of 19 percent (Source: AMFI, Data as of Nov 23).

On the back of relatively lower historic returns compared to earnings growth, large caps appear favourable on a risk reward basis, it advised investors. What should an investor do? Notwithstanding the above average valuations, the favourable earnings cycle and policy stability make it positive on equities over the medium term, said the brokerage.

"The reasonable earnings growth in the medium term could make valuations seem rational over time. The domestic economy is in fine fettle while the global economy could stabilise as interest rates start their downward journey. Unlike prior election years, the base case of policy continuity could limit the volatility around the election period.

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