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We expect central banks and their monetary policy actions to decide the path in 2024. We believe RBI could lag Fed’s rate cuts, at the start of H2. Although a recession is not our base case, we expect central banks to avoid premature decisions in 2024 as well. The revival in rural wages and absence of election hangover now sets a clearer direction for the markets. Our assessment of financials of ~4,000 companies reveals that fiscal positions are aligned for a pickup in private capex. Large caps could find more favour in 2024 vs. 2023 with a tilt towards growth vs value, in our view. Companies playing the premiumisation strategy will continue to benefit from India’s rising income levels. NBFCs will do well in an easing rate environment. We continue to like the Defence space as India’s indigenisation story is underway. The best is yet to come.

* Recession not in our base case: 2023 was a positive surprise for the global financial markets - risk takers amongst asset allocators were well-rewarded. At a macro level, markets kept pushing recession expectations further down, given easing inflation and consumption-led growth. Central banks played a key role in maintaining price stability while navigating the tricky economic maze. Here on, as markets are trying to time the commencement of the last leg of this rate cycle, we argue that the underlying situation for rate cuts will decide the course of monetary policy in 2024. By May/Jun’24, Fed will be in a better position to start easing, and we expect RBI to ease at the start of H2 2024. Although recession is not our base case, we believe central banks will continue to tread cautiously and avoid any premature moves in 2024 as well.

*Election would still move markets: Results of the December state elections have allayed market fears on policy continuity and risk of populist measures. Our analysis of the past five elections reveals that Nifty, on average, closes on a positive note in the year before and in the year of general elections; this sets a path for Nifty in 2024. Markets have factored in policy continuity; opinion polls are building in lower number of seats but we believe that a 300+ seat tally for BJP could trigger another rally in the Indian markets.

* Green shoots in rural; El Nino still a concern: Recent market surveys indicate consistent and noteworthy improvement in rural consumption, which bodes well for the economy as a whole. Listed consumer results do not, however, portray such a picture yet. Rural wages have turned positive in real terms even as employment under MGNREGA has slowed to its lowest levels since 2021, indicating that the rural activity is absorbing labour with inflation beating remuneration. This is also corroborated by survey results indicating increased discretionary spending in the rural economy. However, the risk of El Nino still lingers on the rural economy, but we believe that as long as El Nino conditions don’t spill over to the upcoming monsoon season (Jun-Sep’24), the impact on the economy will be minimal.

* We expect large-caps to do well in 2024: Amidst two ongoing wars and recession whispers, Nifty outperformed the EM basket with a 20% gain in 2023, after 19 months of nil return. Rising bond yields did give rise to risk-off sentiments during the latter part of the year but these were short-lived. SMID outperformance in 2023 was led by improved investor appetite and liquidity, but this reverted in December and we believe Nifty 50 could outperform in 2024. At 19.6X one year forward PE, Nifty is trading at a reasonable valuation; while, on price-to-book basis it is trading slightly higher than +1 standard deviation. We will continue to play the capex revival theme through Industrials, Power, Cement and ancillaries. Defence sector will continue to do well as India’s indigenisation story is underway. We like NBFCs given the easing rate environment. We expect INR to trade in the range of 82.5 to 85.5/USD with an appreciating bias, led by increased flows due to bond inclusion. On the fixed income side, we recommend locking in yields at these levels.

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