Rate impact, inflation decline: Axis MF forecasts 2024 as year of contrast

2024 could be the year of two halves – the first half that would witness the lagged effects of monetary transmission of interest rates and the second half benefiting from declining inflation and rate cuts thereof, said Axis Mutual Fund on Thursday.

"With global inflation finally edging lower, many central banks should begin easing monetary policy by mid-2024. This, in our view, should turn out to be a powerful catalyst for equities," the fund house stated in its equity outlook for the next year, adding that in the past the equity market was seen rising ahead of the rate cuts and falling once the cuts happen.

Citing the recent state election results, the note stated that the risks from the general election are low. The policy continuity could lead to a further rally in the equity market. According to Ashish Gupta, Chief Investment Officer at the fund house, and Shreyas Devalkar, who heads the equity investment team, the growth in the first half will likely be driven by election-related spending. "Post elections, we expect investment growth to take centre stage particularly from the private sector," they said.

On valuations, the outlook noted that mid-cap and small-cap stocks are trading above their historic premium to large-cap indices, while also pointing out that this could be a result of earnings upgrades they have seen in the past four quarters.

"Meanwhile, the Nifty, bolstered by a solid earnings trajectory, is currently trading at approximately 20 times on a 1-year forward basis. Assuming there are no significant external disruptions, the existing market multiples are likely to be maintained, supported by strong domestic investment flows. Domestic cyclicals continued to lead earnings growth and one can expect the strong performance of domestic cyclicals to continue for the remainder of FY24, driven by better-than-expected margin improvement in automobiles and stable Net Interest Margins (NIMs) for banks. Consumption-based sectors would remain under pressure given the lacklustre rural recovery," the release stated.