Market Continues to be Driven by the ‘Narrative’ in Near Term
Axis Top Picks basket delivered impressive returns of 46% in the last one year, against the 27% return posted by the benchmark Nifty 50, implying a commendable outperformance of 19% over the benchmark. In Feb’24 (Since 2 nd Feb’24), the basket inched up further by 1.8%. We are extremely happy to share that our Top Picks Basket has delivered an astounding return of 264% since its inception (May’20), which stands well above the 137% return delivered by NIFTY 50 over the same period. Given these results, we maintain our confidence in our thematic approach to Top Picks selection.
Macroeconomic narrative turned positive for equities: Feb’24 turned out to be a favourable month for the Indian equity market as the macroeconomic narrative further strengthened in favour of the overall equity market. Thanks to this favourable narrative, Nifty touched an all-time high of 22,217 on 22nd Feb’24. This was driven by improvement in various macroeconomic parameters such as 1) Improved sentiments regarding policy continuity, 2) Q3FY24 earnings season meeting expectations, 3) Strong domestic inflows, and 4) Improvement in high-frequency indicators. Earlier during the month, our honourable Finance Minister Nirmala Sitaraman presented the Interim Budget 2024-25 on 1st Feb’24. Being the “vote of account” budget before the Union Election 2024, the expectations of the budget were naturally low. The finance minister delivered along the expected lines with an emphasis on the continuation of higher capital expenditure on top of the medium-term flavour of populism. We believe that the Budget has proactively set the tone for economic development in the upcoming years. Overall, we believe a Vote-of Account-Budget has successfully set the narrative of “Viksit Bharat”.
We maintain our Dec’24 Nifty target at 23000
Base case: The Indian economy stands at a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. We continue to believe in its long-term growth story on account of the country’s favourable structure, thanks to the increasing Capex which is enabling banks to improve credit growth. These factors will ensure that Indian equities will easily manage to deliver double digit returns in the next 2-3 years, supported by double-digit earnings growth. Against this backdrop, we foresee Nifty earnings to post excellent growth of 15% CAGR over FY23-26. Financials remain the biggest contributors for FY24/25 earnings. In our base case, we assume the continuation of the political stability and consequent visibility on the policy continuity after the 2024 general elections.
In our base case, we maintain our Dec’24 Nifty target at 23000 as we value it at 20x on Dec’25 earnings. The current level of India VIX is below its long-term average, indicating that the market is currently in a neutral zone (neither panic nor exuberance). While the medium to long-term outlook for the overall market remains positive, we may see volatility in the short run with the market responding in either direction. Keeping this in view, the current setup is a ‘Buy on Dips’ market. We recommend investors to remain invested in the market and maintain good liquidity (10%) to use any dips in a phased manner and build a position in high-quality companies (where the earnings visibility is quite high) with an investment horizon of 12-18 months.
Bull case: In the bull case, we value NIFTY at 22x, which translates into a Dec’24 target of 25,000. Our bull case assumption is based on the overall reduction in volatility and the success of a soft landing in the US market. At present, we find ourselves near the peak of the current rate hike cycle, and the outlook for a soft landing has notably strengthened over the last one to two months. The market is currently building an expectation of one rate cut by US FED around May-Jun’24 and developments regarding the same will be keenly watched by the Street. If the market sails through the next 1 or 2 quarters smoothly, we would likely see the next level of triggers along with money flowing to EMs. In the Bull case, we foresee the Nifty earnings to grow at a CAGR of 16% from FY23-26. This, in turn, would increase the market multiple.
Bear Case: In the bear case, we value NIFTY at 16x, which translates into a Dec’24 target of 18,500. We assumed the market to trade at an average valuation led by political instability in case of no clear mandate in the 2024 General Election. Adding to that, we assumed inflation continues to pose challenges in the developed world. Currently, we are near the peak of the rate hike cycle and the market has not seen such levels of interest rate hike in the recent past. Hence the chances to go wrong have increased significantly. If this scenario materializes, it would translate into a slowdown or heightened recession in the developed market, which in turn, will impact export-oriented growth in the domestic market. This will consequently pose challenges to the earnings and market multiple of the domestic market.
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