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Best among the Rest

* Rewind and relive the magic: India ended the eventful CY23 on a high note, with the Nifty delivering 20% returns, marking the eighth consecutive year of a positive close. The expectations of the peaking of rate hike cycle, moderating inflation, improving liquidity, and consistently rising retail participation in equities, along with strong corporate earnings, drove this performance. The resounding victory of BJP in the three key state elections in Dec’23 added to the positive sentiments as it further strengthened the expectation of political continuity after the 2024 General Elections in Apr/May’24. Even over the long term, India continues to be one of the top-performing markets with a 3-/5-/10-year return CAGR of 16%/ 15%/13% (in local currency terms) and a CAGR of 11%/11%/10% (in USD terms).

* Sharp outperformance by mid/small-caps: The highlight of CY23 for Indian markets was the sharp outperformance of mid- and small-cap stocks. The Nifty Midcap 100 (up 47% YoY) and the Nifty Smallcap 100 index (up 56% YoY) outperformed the Nifty by a wide margin in CY23. Even as FII flows turned around in CY23 (USD21b of inflows in CY23 vs. USD17b of outflows in CY22), the domestic flows remained resilient with USD22b of inflows (+USD32b in CY22) amidst hectic primary and secondary market activities.

Three important ponderables

* As the 3QFY24 earnings season is set to begin, we see three important factors that will dominate investor conversations: 1) Rate cuts: The series of rate hikes by global central banks to combat inflation over the last two years is expected to have reached its peak. The US FED has maintained the benchmark rates for the third consecutive time, so the likelihood of a rate cut remains high in 1HCY24. This could boost liquidity, as demonstrated by the surge in global equity markets during Nov-Dec’23, and the moderation in the US 10-year yields from their multiyear highs. However, the quantum and timing of the same will be keenly monitored. 2) Political continuity: The recent outcome of the state elections in four states boosted the market confidence for an unprecedented third consecutive term for the current administration after the 2024 General Elections. This could keep the equity market multiples elevated in the near term as political continuity could augur well for policy momentum and reforms. 3) Institutional Flows: DII + FII flows in CY23 stood at USD44b, the highest ever in a calendar year. Growing equity culture (rising SIP contributions and new demat accounts) in allocation of retail savings post-pandemic has moderated the market volatility. India's solid macroeconomic fundamentals in the context of weak global growth as well as prospects of another year of healthy corporate earnings should keep the flows resilient, in our view

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