To equity or not to equity

As we come to the start of calendar 2024, it is time to take stock of the current state of the economy and what it holds for us moving forward.

But before we delve into the subject let us take some time to describe the astonishing growth the year has given so far. The midcap and the small cap indices have of course been runaway winners with both of them increasing by more than 40% and the BSE 500 by more than 27%. With the Nifty being the relative laggard and quite a few indices showing more than 75% gains, it has been a windfall year for equity participants who stayed invested.

But what are we expecting in the year ahead? And what will drive the growth??

India’s GDP is poised to return 7% plus returns and consensus points to a 7.2% growth. The listed space is likely to do a bottom-line growth of 12 per cent and with the private capex cycle kicking in after many years, demand for commodities is a given. The inflation, especially food inflation is likely to be benign and versus 2023 and this will also prompt consumer consumption. Interest rates on the back of lower predicted inflation is likely to be of much lower concern going forward. The US economy is preparing itself well and with the Federal Reserve signalling three rate cuts for 2024, the anticipated spike in US consumption, real income growth and consumption bodes well for us in India too. Theatres of conflict all over the world – the Russia-Ukraine conflict is reducing it’s impact footprint, in neighbouring Europe as well as other economies. The recent skirmish in the Israel-Palestine sector is accounted for by the rest of the world and the fears we harboured for it’s impact on the Suez and the consequent impact on the energy shipping lines is now much mitigated. All said and spoken on the US-China face off is on the path to rectifying and the US has recorded the highest import levels from China and in recent times the two heads of state of the US and China have lowered the vitriol and started speaking again. It is a sign of thaw in relations and also is a portent to higher cooperation and trade between the two largest economies.

So much for the good tidings. What about the concerns?

The biggest one in India is of course the elections and it’s outcome. No matter how much a settled issue it is, there could always be a slip between the cup and the lip. And with the budget and possible populism that might be embedded into it, the consequence it has on the current account deficit is a concern. The capital account is well placed and hopefully it will stay that way. But the depreciation of the currency vis a vis the US Dollar which impacts our import bill significantly could upset quite a few economy markers. And then of course the biggest worry is the monsoons. We have not had a very good monsoon for the last few years and if the law of averages plays out perhaps the concern is lower this year but one never knows. Will the foreigners invest less this year? It does not carry as much impact as it used to as domestic investors have ramped up to such an extent that it exceeds the foreign money flow.

So on the balance, this could …rather, should be another positive year for the equity investor. Would it be realistic expectation to look out for high double-digit returns? I will put my neck on the chopper and say every indicator points out to good times.

Prasunjit Mukherjee