Stable macro, elevated earnings growth to support equities in 2024: Chawla

First half of the current financial year witnessed strong earnings growth of about 30 per cent for the Nifty50 index, says Chawla

Though the market has already priced in most of the possible positive outcomes in 2024, there are still tailwinds, like a rebound in mid- to lower-end consumption and a sharp pickup in corporate capex. These can create room for further upside in the equity market, says Sanjay Chawla, chief investment officer (CIO) – equity, Baroda BNP Paribas Mutual Fund, in an e-mail interaction with Abhishek Kumar. Edited excerpts:

What is your earnings growth expectation for FY24? Will it be enough to sustain the present valuations?

First half of the current financial year witnessed strong earnings growth of about 30 per cent for the Nifty50 index. This growth was broad-based across sectors. Hence, despite the midcap and smallcap indices outperforming Nifty 50 in the last one year, the valuation gap has not widened. High-frequency data, which tends to be a lead indicator for earnings, remains encouraging.  Valuations are in line with the last five-year average. Stable macro, better earnings vis-à-vis the historic averages, peaking of interest rates, inflation being under control, and policy momentum augurs well for the India story. Further, political stability is leading to strong foreign flows.

The market is said to have already priced in favourable outcomes in the upcoming general election and in the interest rate cycle. Are there any other factors that can positively surprise the market in 2024?

We foresee three potential positive surprises. Firstly, the consumption demand, particularly at the mid- and lower- end has been muted. With expected reduction in interest rates, there could be an uptick. Secondly, we are seeing initial signs of pick up in corporate capex. This can lead to a positive surprise on the credit growth front for the banks. Lastly, as emerging markets turn favourable following interest rate cuts, the flows from foreign institutional investors can surprise and lead to higher multiples for the market.

Any risks you foresee?

The biggest risk at this point of time is geopolitics. Any significant escalation in ongoing disputes can lead to significant reduction in investors’ risk appetite. Also, many countries, including some major economies, are going to polls this year. Any change in policies, post the formation of the new government may have a bearing on global trade. Another risk would be continued subdued demand at the lower end of the consumption bracket.

Sector-wise, where are you seeing opportunities right now? Are there any sectors you are pessimistic on?

We see opportunity in financials, both banks and non-banking financial sector stocks.  Financials had underperformed the broader markets over the last one year. While credit growth has improved, concerns remain on net interest margin (NIM) compression in the near term. The year 2024 could see rate cuts as indicated by the US Federal Reserve. Consequently, we believe interest rate-driven businesses can do well. Valuations are in the fair zone and could expand during the year. Also, we expect the capex cycle to pick up momentum post the central election. This should offer improved visibility to capital goods companies. Opportunities are also visible in the cement sector.

IT stocks were under pressure for most of 2023. Does this year belong to the sector?

IT stocks had a mixed 2023. While midcap companies outperformed, largecaps either matched the index in terms of returns or underperformed. They have been facing headwinds owing to cuts in discretionary spends by clients and stalling of project. However, deal flows were strong. With some stability in global macro, decision making from clients may improve in the coming times. 

The market-beating Q3 results and deal flows have already led to a turnaround in sentiment to an extent. Which funds should investors prefer in the current scenario?

Choice of funds is subject to an investor’s need and risk appetite. Balanced advantage funds are a good option if you do not want to take the asset allocation call. This category of funds can offer optimum risk-adjusted returns.