Yearly Update Jan 2024
We wish all our readers a very Happy New Year and a wonderful 2024. After a tremendous 2023 for the equity markets, we start a new year full of hope and expectations. As always, this hope is mixed with fears about how things will turn out. In this letter, we would like to share a few key insights from 2023 along with our views for 2024.
2023 trends in equity markets
- Huge investments by both foreign and domestic investors –2023 was the first year that Indian markets saw inflows of more than 2 lakh crores each from both Foreign & Domestic Investors. Consistent monthly SIPs of more than 15,000 crores in mutual funds (lot of small caps and thematic) and heavy FII buying in large caps drove the markets higher
- Strong returns from Mid and small caps –Small and mid-caps delivered very strong returns in 2023. In fact, the SME, micro-cap markets were even more buoyant
- Unfortunate rise in futures and options trading –With a lot of marketing, retail investor trading in futures and options has gone up a lot. As per recent SEBI notes, 99% of such retail investors lose money in such trades. It is very important that we remain cautious
- Global markets had a surprising leader –Despite the prolonged Russia Ukraine conflict, Russia topped equity market gains globally in CY2023 with 41% gains!
Looking Forward to 2024
An interesting fact about 2024 is that we will see 40% of the world voting in elections. More than 2 billion voters across the world will vote in countries which represent 42% of the world’s GDP. Traditionally such times have also seen uncertainty in policy making and the markets are also jittery about the outcomes (even if it may not matter in the long term).
While it is foolhardy to make predictions, let us look at the market from the three lenses of Valuations, Earnings and Liquidity
- Valuations – While large caps are trading at long term valuations, small caps are trading more than 20% above historical averages. Very strong earnings growth will be required in the mid and small cap space to support such valuations. Else, this segment will see either time correction or price correction. It is important to avoid the story telling (order-based valuations etc.) in this segment
- Earnings– In 2023, the earnings growth was fueled by margin expansion due to drop in commodity prices as well as low provisioning by banks (makes up 35% of the index). Broad based volume growth will be the key for future growth. Robust economic activity as well as large private and public capital expenditure is very promising for long term earnings
- Liquidity– 2024 promises more liquidity in the Indian markets – heavy inflows into equities via Mutual fund SIPs. With interest rates expected to drop in the US, FII Inflows are expected to be strong
Markets can remain irrational for long periods of time; however, they do revert to the mean in the long run. Right now, while every factor is looking positive (low oil prices, high investor flows, strong earnings), it is important to brace ourselves for short term volatility and time correction.
The markets have been remarkably consistent in the last decade. In fact, 2023 was the 8th year in a row when the Nifty 50 gave positive returns. A new generation of investors have never seen negative markets (except for a brief period in 2020 during Covid). Experienced investors like Sankaran Naren often share how tough investing was between 2000 and 2013 when the market fell more than 10% on multiple occasions.
Way Ahead for us as Investors
We need not fear investing in the markets, just because it is at an All Time High. Looking at the last 30 years of Indian markets, markets have given on an average 11% returns over 3-year time periods, even when we invest at All-time highs. It is very important to stay invested in the markets for the long run to reap the benefits.
However, managing asset allocation and goals is of paramount importance. If an investor has exceeded the target allocations for mid and small caps, then this is a great time to rebalance. Similarly, if investors have short term goals for which they have heavy equity exposure, then this is again a great time to rebalance from equity to fixed income.
The long-term outlook for the India economy is bright with robust tax collections and infrastructure investments. Indian markets have continued to deliver exceptional returns over the long run for investors who can endure short term volatility. We look forward to partnering with you on this journey. Happy New Year again!
