As 2023 ends and the New Year begins, investors are a happy lot. Nifty has delivered decent returns and the mid and small cap indices have delivered spectacular returns.
What are the prospects for the New Year?
The Fed chief Jerome Powell has played the Santa Claus this December with a dovish comment that has triggered a global rally enriching millions of investors. Earlier this month, the state elections results had delivered a super Monday on 4th December which lifted the Sensex by 1380-points and on 14th December the Dovish Fed has delivered another massive 930-point Sensex rally. Will this Santa Claus rally evolve into a pre-election rally taking the markets to a series of new highs?
The Fed’s dovish pivot
The Fed chief Jerome Powell has done a great job of what he called “navigating under stars in cloudy skies”. The US economy is headed for a soft landing: Inflation is trending down without pushing the US economy into a recession and high unemployment. The US economy, which was widely expected to tip into a recession by end 2023, is likely to end the year with a decent growth of 2.4 percent with unemployment of only 3.7 percent. This tightening cycle, which saw eleven rate hikes taking the Fed funds rate to a 22-year high of 5.25 to 5.5 percent, has ended. The Fed has indicated the possibility of three rate cuts in 2024 and Fed funds rate at 4.6 percent by end 2024. The market reacted with the US 10-year bond yield crashing below 4 percent and pushing the Dow to a record high. Celebration in the mother market is spreading to other markets, globally.
Drivers of the rally
The ongoing rally in the market, which has taken the Sensex and Nifty to record highs, is being led by mainly four triggers:
One, the domestic fund flows to the market is robust. The total Demat accounts have exploded to above 13 crores; the AUM of the mutual fund industry has touched Rs 50 trillion; and the monthly SIPs have crossed Rs 17,000 crores in November this year. The financialization of savings is becoming a strong trend, imparting resilience to the market.
Two, the sharp correction in the US bond yield has turned the FPIs from sellers to buyers, contributing to the rally. FPI inflows are likely to gather momentum, going forward.
Three, the state election results indicate political stability after the 2024 General elections. The market likes political stability and a market-friendly reform-oriented government.
Four, the economy is doing well, and corporate earnings are set to grow impressively. India’s GDP growth in Q2 FY24 at 7.6 percent surprised even the optimists and the FY 24 GDP growth has been revised up to 7 percent. This fundamental support can keep the market bullish.
Market is all about expectations. During all the last five General elections from 1999 to 2019, the market staged pre-election rallies delivering returns ranging from 3 to 36 percent. Circumstances are favorable for a pre-election rally, this time too. Perhaps, it has already begun.
The valuation concern
When it is raining good news, the market responds strongly and there is the risk of all good news getting reflected in the price very soon. So, has the rally already pushed the valuations to elevated levels? Nifty at 21,000 is trading at above 23 times trailing twelve months earnings and around 21 times estimated FY24 earnings. These are high valuations, much higher than long-term averages. But soon the market will start discounting FY25 earnings. If India can deliver a GDP growth of 7 percent in FY25 accompanied by above 15 percent growth in corporate earnings, the valuation will not be excessive. Of course, the valuation in the broader market is very high and hard to justify. Safety, now, is in large caps.
Even though some profit booking on sharp rallies is always advisable, it makes sense to remain invested in this bull market. The overarching theme for investment should be the India Growth story, which is the best among the large economies of the world. The Indian economy is headed for $ 8 trillion GDP with a possible market cap of around $ 10 trillion by 2032. Investors would be better off participating in this historic wealth creation opportunity by remaining invested and continuing with systematic investment.