Adopt a multi-asset allocation strategy for 2024

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The spectacular rally in the market in December has pushed the Sensex and Nifty to new all-time highs. The magic marks of 20,000 Nifty and 70,000 Sensex have been easily scaled and the rally looks strong. Nifty has delivered decent returns, and the broader market has delivered spectacular returns. How should investors approach the New Year?

The December rally has been powered by surprisingly favourable triggers. The state election results were greeted by the market with a 1380-point rally in the Sensex on 4th December. The market’s message is that the uncertainty surrounding the outcome of the 2024 General elections is out of the way. The market likes stability and continuity of policies. A shot in the arm for the market came from the Fed on 13th December through its surprisingly dovish message which indicated three rate cuts in 2024. Declining interest rate scenario is hugely positive for the stock market. This will be a major influence on the market in 2024.

India’s economic growth has surprised on the upside. FY 24 GDP growth has been revised up to 7 percent. INR is stable and inflation, though a bit high, is within the RBI’s tolerance band. Tax buoyancy has ensured that fiscal deficit target can be reached; and rising services exports and soft crude can ensure that CAD remains under control. The banking system is in the pink of health and the corporate sector is deleveraged. In brief, global interest rate trends, domestic politics and domestic economics are all ticking the right boxes- a blue sky scenario.

These favourable domestic and global triggers have boosted the already high retail investor enthusiasm. Steadily rising inflows into the market have pushed up the valuations in the mid and small cap segments to risky territory. This is an area of serious concern.

A common pattern in the pre-election market behaviour during the last five General elections is that the market will rally in the run up to the elections. There is a likelihood of that pattern repeating this time, too. But the risk is that valuations are already a bit high and further rally can push the valuations to risky territory. The market is discounting a very optimistic scenario. The flip side of this optimistic scenario is that unexpected negative developments can cause sharp corrections, since at high valuations the market is vulnerable to corrections.

 Even while remaining optimistic, investors should be cautious about the market running too much ahead of fundamentals. In 2023, the mid and small caps outperformed the large caps in general and particularly in segments like IT and financials. There is a high possibility of this trend reversing in favour of large caps in 2024. Prioritising large caps over mid and small caps would be a good strategy in the New Year.

Adopt a multi-asset allocation strategy for 2024 by investing in equity, fixed income, and gold with high weightage for equity. Investors should keep in mind the fact that equity has outperformed fixed income and gold by a decent margin during the last 5 to 30 years. This trend will continue for many years to come.

Happy New Year! Happy Investing!

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