After experiencing two consecutive months of future gains, major benchmark indices like the Nifty and the S&P BSE Sensex remained relatively unchanged in January 2024. However, mid-cap and small-cap indexes outperformed the large-cap benchmarks during this period.
Several key events and factors influenced the market dynamics, including escalating tensions in the Middle East, a reduced likelihood of a US recession, and optimistic projections by the National Statistics Organisation (NSO) regarding India’s Gross Domestic Product (GDP) growth for FY24, which surpassed consensus expectations. |
Sector-wise performance varied, with notable gains seen in sectors such as oil and gas, power, healthcare, and auto, while banking, Fast-Moving Consumer Goods (FMCGs), and metal sectors underperformed. Globally, market performance was mixed, with some indices in Japan, the US, and Europe recording gains, while markets in China and Korea lagged behind. Foreign Portfolio Investors (FPIs) sold equities worth US$ 3.1 billion in January 2024, reversing their net purchases in December 2023.
Conversely, Domestic Institutional Investors (DIIs) bought net equity worth US$ 3.3 billion during the same period. Flows to Mutual Funds (MF) increased in December 2023 compared to November 2023, with equity-oriented schemes witnessing significant inflows.
However, results from various sectors for Q2FY24 were mixed, with some sectors surpassing expectations while others performed in line or below expectations. Looking ahead, the Nifty 50 was trading at about 18x FY26E price-to-earnings multiple as of January 31, 2024.
Market cap-to-GDP ratio remained over 100%, and the gap between 10-year Government Securities (G-Secs) yield and 1-year-forward Nifty 50 earnings yield remained elevated. While current valuation indicators are above historical averages, they should be considered in the context of strong nominal GDP growth, positive corporate earnings outlook, and healthy corporate and banking balance sheets.
Although valuations for most major sectors are higher than long-term averages, small-cap and mid-cap indices trade at a significant premium to their historical averages. Despite near-term risks such as global growth slowdown, geopolitical tensions, and inflation concerns, experts maintain a positive outlook on equities for the medium-to-long term.
This optimism is driven by a robust domestic growth outlook, healthy corporate profitability, and supportive pro-growth policies. However, careful stock selection becomes increasingly important in an environment of elevated valuations.
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