An Eye on the Equity Market in January 2024

After two consecutive months of gains, benchmark indices such as the Nifty and the S&P BSE Sensex closed almost flat in January 2024. Mid-cap and small-cap indexes outperformed the large-cap benchmarks. 

The key events and factors included escalating tensions in the Middle East, diminishing likelihood of a US recession, and the National Statistics Organisation (NSO) projecting India’s Gross Domestic Product (GDP) growth for FY24 at 7.3%, surpassing consensus expectations, among others. 

The sector indices exhibited a mixed performance, with strong gains in oil and gas, power, healthcare, and auto, while banking, Fast-Moving Consumer Goods (FMCGs), and metal underperformed.   

The global market performance was varied, with month-on-month gains seen in Japanese, the US, and European indices, while Chinese and Korean markets underperformed.

Foreign Portfolio Investors (FPIs) sold equities worth US$ 3.1 billion in January 2024 as opposed to a net purchase of US$ 7.9 billion in December 2023. The FPIs have bought equities worth US$ 20.8 billion in 10MFY24 (10MFY23: US$ 5.4 billion). 

On the other hand, Domestic Institutional Investors (DIIs) bought net equity worth US$ 3.3 billion in January 2024 (December 2023: US$ 1.6 billion)  and have cumulatively bought equity worth US$ 15.5 billion in 10MFY24 (10MFY23: US$ 26.1 billion). 

Similarly, flows to Mutual Funds (MF) increased to Rs 24,800 crore in December 2023 as compared to Rs 21,700 crore in November 2023. Cumulatively, MF flows in equity-oriented schemes in 9MFY24 stood at Rs 1,58,000 crore. 

Of the Q2FY24 results declared so far, earnings of banks, Information Technology (IT), cement and pharma sectors were better than expected, while that of Non-Banking Financial Companies (NBFCs), metals, oil and gas, capital goods, consumer staples and durables were in line with expectations. The results of logistics and chemicals were lower than expected. 

The Roadmap Ahead

 As on January 31, 2024, the Nifty 50 was trading at about 18x FY26E price-to-earnings multiple. Furthermore, market cap-to-GDP stood over 100% (based on CY25 GDP estimates), and the gap between 10-year Government Securities (G-Secs) yield and 1year-forward Nifty 50 earnings yield* remains at an elevated level [*Earnings yield = 1/ (one year forward P/E)].

In general, current valuation indicators are at a premium to their historical averages. However, one should view these valuations in the context of structurally attractive nominal GDP growth, a healthy corporate earnings outlook and robust de-levered corporate and banking balance sheets. 

Apart from private banks, valuations for most major sectors are higher as compared to long-term averages.

The sharp broad-based rally in the current financial year has resulted in small-cap and mid-cap indices significantly outperforming, and they now trade at a noteworthy premium to their long-term average valuation. Given the aggregate valuation being higher than the historical average, the importance of stock selection increases even more. 

Experts maintain a positive outlook on equities for the medium-to-long term, driven by the structurally robust domestic growth outlook, healthy corporate profitability, and supportive pro-growth policies. However, near-term risks include a significant global growth slowdown, heightened geopolitical tensions, and a resurgence of global or domestic inflation.