Equities shine in 2023, but can they sustain the momentum in 2024?

Equities have been the star performers of 2023, delivering stellar returns to investors across the globe. The Indian stock market, in particular, has witnessed a record-breaking rally, with the BSE Sensex crossing 71,000 and the Nifty 21,000 for the first time in history. But as the year draws to a close, the question on everyone’s mind is: can equities continue their winning streak in 2024?

There are several factors that contributed to the equity boom in 2023, both domestic and global. Some of the key drivers are:

Equities shine in 2023, but can they sustain the momentum in 2024?
Equities shine in 2023, but can they sustain the momentum in 2024?
  • Economic recovery: The global economy bounced back strongly from the pandemic-induced slowdown, thanks to the widespread vaccination and fiscal stimulus. The International Monetary Fund (IMF) projected the world economy to grow by 6.2 percent in 2023, the fastest pace since 1976. India, too, witnessed a robust recovery, with the GDP growth estimated at 9.5 percent for the fiscal year 2023-24, the highest among the major economies.
  • Liquidity and low interest rates: The central banks around the world maintained an accommodative monetary policy stance, keeping the interest rates low and injecting liquidity into the financial system. This boosted the risk appetite of investors, who flocked to equities in search of higher returns. The US Federal Reserve, in particular, delayed its tapering and rate hike plans, despite the rising inflation pressures, which supported the global equity markets.
  • Corporate earnings: The corporate sector showed resilience and profitability in the face of the pandemic challenges, posting impressive earnings growth across sectors and regions. The Indian corporate earnings, for instance, grew by 35 percent year-on-year in the September quarter, beating the expectations. The earnings growth was broad-based, with sectors such as IT, pharma, metals, consumer, and banking leading the way.
  • Reforms and policy support: The governments and regulators also played a key role in supporting the equity markets, by announcing various reforms and policy measures to boost growth and investment. The Indian government, for example, announced several initiatives, such as the National Monetisation Pipeline, the Production-Linked Incentive scheme, the Bad Bank, the GST reforms, and the privatization of public sector enterprises, which improved the business sentiment and outlook.

What are the challenges and opportunities for equities in 2024?

While equities have enjoyed a phenomenal run in 2023, they may face some headwinds and uncertainties in 2024. Some of the potential challenges and opportunities are:

  • Inflation and interest rates: The biggest risk for the equity markets in 2024 is the rising inflation, which may force the central banks to tighten their monetary policy sooner than expected. The US Fed, for instance, has indicated that it may start tapering its bond purchases in early 2024, and may hike the interest rates by mid-2024, depending on the inflation trajectory. This may trigger a sell-off in the equity markets, especially in the emerging markets, which are vulnerable to the capital outflows and currency depreciation.
  • Geopolitical and regulatory risks: The equity markets may also face some geopolitical and regulatory risks, which may increase the volatility and uncertainty. The tensions between the US and China, the political instability in Afghanistan, the Iran nuclear deal, the Brexit negotiations, and the climate change issues are some of the geopolitical factors that may affect the global equity markets. The regulatory risks, such as the antitrust actions against the big tech companies, the tax reforms, the data privacy laws, and the environmental, social, and governance (ESG) norms, may also have an impact on the equity valuations and performance.
  • Sectoral and thematic opportunities: Despite the challenges, the equity markets may also offer some sectoral and thematic opportunities, which may outperform the broader market. The sectors that may benefit from the economic recovery, the digital transformation, the innovation, and the consumer demand are likely to do well in 2024. Some of the themes that may gain traction are the green energy, the electric vehicles, the healthcare, the fintech, the e-commerce, and the gaming.

How should investors position themselves for 2024?

The equity markets are expected to remain buoyant in 2024, but may also witness some corrections and consolidation, as the valuations are stretched and the expectations are high. Therefore, investors should adopt a balanced and diversified approach, and focus on the quality and growth aspects of the companies. Investors should also be prepared for the volatility and uncertainty, and have a long-term horizon and a disciplined strategy. Equities are still the best asset class for wealth creation, but investors should be realistic and prudent in their expectations and decisions.

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