Enter 2024 with low return expectations from market, warns Kotak Securities

Kotak thinks it is best to avoid sectors like automobiles and components, electric utilities and IT services

Even though the Nifty 50 Index is up 20 per cent in the calendar year 2023, brokerage Kotak Institutional Equities has cautioned investors to enter the new year with low return expectations from the market given the conflict between fundamentals

(value) and sentiment (price). It believes there is very little value in the market across the capitalization spectrum after the recent run-up in the mega-cap. 

"2024 could finally see a convergence between price and value or a continued large disconnect between price and value, the case for the past 6-9 months. High ‘absolute’ valuations should logically drive convergence over time, while ‘positive’ incremental news (already discounted though) may sustain divergence with sentiment overpowering fundamentals," said Sanjeev Prasad, an analyst at Kotak Institutional Equities. 

The brokerage finds very little value in most parts of the market after the recent run-up in mega-cap. stocks, the last bastion of value in the market until recently and has been quite cautious on the mid-cap. and small-cap stocks for the past three to four months.

Strong performance across all sectors in 2023; banks and oil, gas and consumable fuels sectors joined the party late

Nifty-50 Index gained 20% in CYTD23 but has lagged mid-cap. and small-cap. indices

The NSE Midcap 100 Index is already up 45 per cent and the NSE Smallcap 100 Index is up 53 per cent this year. 

The Indian market is richly valued both on a top-down and bottom-up basis. 

Nifty-50 index is trading at full valuations; recent history more relevant

What can sustain India's rich market valuation? 

India’s decent macro-economic fundamentals, strong expectations of lower global interest rates on the back of declining headline and core inflation in major economies and reduced election risk after the BJP’s strong performance in recent state elections may sustain the Indian market’s rich valuations, as per the brokerage.

"The market may conveniently ignore the fact that valuations of most stocks are well above their pre-pandemic levels when interest rates will likely be higher versus pre-pandemic levels even after potential rate cuts in 2024-25, global growth rates will be lower and weigh on certain export-oriented sectors, fundamentals of several sectors and companies will weaken, especially in the consumption-related sectors and  excess industrial capacity in China may act as a limiting factor on the prices of commodities," said Anindya Bhowmik of Kotak Institutional Equities. 

The brokerage expects net profits of the Nifty-50 Index to grow 18 per cent in FY2024 and 11 per cent in FY2025.

What should investors do? 

"Portfolio construction is a challenge in the context of  unfavorable reward-risk balance on fundamentals across sectors and stocks and unflinching exuberance among investors, as can be seen in large positive inflows into the market by FPIs in the past two months) and by domestic investors for the past several months propelled by enthusiastic retail investors," said Bhowmik. 

She thinks it is  best to avoid sectors and companies with the biggest distortion in price-value proposition irrespective of incremental developments. It would appear that investors are taking their cues from incremental developments and events and ignoring the fact that absolute valuations may already be pricing in the positive developments (real or even purported). "We find this most prevalent in automobiles and components, electric utilities and IT services," said  Bhowmik.

(Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)