India remains the fastest growing major economy in the world and is well on track to become the world’s 3rd largest over the next 5 years. It has structurally transitioned to a low macroeconomic volatility regime which will support lower risk premiums and higher valuations. The macro-outlook for India also seems to be enjoying a Goldilocks scenario with reasonable growth momentum, stable commodity prices, especially crude, slowing inflation and a weakening dollar bias. India’s GDP is expected to grow 6.5% in FY25.

The fund house believes the new year will be brighter, as some of the key concerns of 2023 – such as the US recession, inflation, rate hikes, and geopolitical tensions – have receded. The interest rate cycle has likely peaked out with an expectation of a rate easing cycle across most economies beginning. ABSLAMC expects a soft landing in the US and a slowdown in global growth, but not an outright global recession. 2024 will be a year when more than 60% of the world population goes for elections and therefore fiscal policy is expected to remain loose globally. Overall, the global macro backdrop has turned supportive.

Equity Outlook 2024

Considering the positive macro environment, ABSLAMC expects the continuing improvement in the corporate profit-to-GDP ratio to sustain. Nifty earnings are expected to grow in the low-to-mid teens on a compounded basis over the next 3 years. The earnings growth should be broad-based across sectors with Banking and Financials, Auto, Industrials, Infrastructure, Cement, and Real Estate sectors leading from the front.

At the same time, liquidity is expected to improve driven by both domestic and FPI flows. However, sentiment is at its peak and is expected to moderate. Overall, the interplay of earnings growth, liquidity, and sentiment is expected to be supportive for equity markets.

Large cap valuations are at just ~5% premium to their historical average indicating that valuations are reasonable. Mid-and-small caps have seen a strong rally in the year gone by that has pushed the valuations above the historical average thereby warranting caution in the near term. The fund house is more inclined towards large caps over mid-and-small caps considering their relative valuation differential is near historic highs. However, with the Indian economy expected to do well, the fund house continues to remain structurally positive on the mid-and-small cap space for the medium-to-long term. With interest rates expected to decline, Growth could outperform Value.

In 2024, the asset manager expects returns to be in line with earnings growth. With global concerns moderating and India’s growth narrative looking compelling, there is a case to remain optimistic over the medium to long term. Domestic focused themes viz. Domestic Manufacturing, Discretionary Consumption, Banking and Financial Services continue to be preferred as well as Digital/Tech.

Equities continues to be the best asset class from a long-term perspective given the strong foundation of India’s growth led by structural reforms and SIP would be best way to participate in this journey.

Fixed Income Outlook 2024

In advanced economies, growth & inflation momentum are normalising near pre-covid levels, but monetary policy is significantly tighter than pre-covid levels. Thus, there is a case for policy normalisation and the debate will focus on the pace of normalisation. Growth momentum is likely to be the bigger driver for the pace of rate cuts than inflation. Emerging market central bankers shift focus from financial stability to local growth inflation reality as global headwinds fade. They will also ease up but response at their end will be delayed compared to developed world counterparts both in magnitude and time. For India, the fund house believes that 2023 has been spent in assessing the terminal policy rates and expected 2024 to start with a lagged impact of restrictive policy & tighter liquidity. For 2024, the headline India CPI is expected to average 4.70-4.75%, which is within RBI's mandate. That’s slightly higher than RBI estimates.

ABSLAMC expects headline policy rates to remain status quo for most of 2024 with the possibility of a shallow rate easing cycle at the end of 2024 unless growth slows down to sub 6%. Real yields are attractive at the current levels. The nominal yield curve is elevated and, on a risk-reward basis, fixed income looks like an investible asset class beyond the asset allocation principle. Time to dial duration is apt now. The fund house expects the average benchmark G-Sec to trend towards 6.75%-7% during 2024.

In 2024, actively managed duration funds are likely to do well within the fixed income space. Short-term funds (Short Term Fund, Corporate Bond Fund and Banking & PSU Fund) could be some of the categories to watch out for in the new year.

Overall, the risk reward seems balanced across various asset classes, hence, for the coming year, it would be prudent to follow a multi-asset allocation approach with the right exposure to Equity, Fixed Income and Gold.

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The views expressed in this article are for knowledge/information purpose only and is not a recommendation, offer or solicitation of business or to buy or sell any securities or to adopt any investment strategy. Aditya Birla Sun Life AMC Limited (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”) is not guaranteeing/offering/ communicating any indicative yield/returns on investments. The sector(s)/stock(s)/issuer(s) mentioned do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s). ABSLAMC has used information that is publicly available including information developed in house. Information gathered and material used in this document is believed to be from reliable sources.

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