Direct Equities: Amid euphoria, look to book gains; prefer large caps

In the global context, narrative for Indian equities continues to be positive – strong GDP growth, manageable inflation, political stability and larger share of FPI flows as India’s rising weightage in multi-country benchmark indices. Although flows currently overwhelm fundamentals, in the context of premium valuations, prospects of global growth slowdown in 1HCY24 and geopolitical risks (widening of Israel-Gaza conflict), we think profit booking (more so in mid/small caps) is not a bad idea. 

Highlights

• Global equities begin CY24 on a strong footing led by a Santa Rally triggered by US Fed’s dovish pivot on interest rates: While US/Europe equities ended CY23 on a high (S&P-500/Euro Stoxx gained 24%/19%), MSCI EM Index underperformed (7% gain in CY23), with a large part of the drag being attributed to China.
• India’s equity markets ended CY23 on a strong note, supported by the US Fed’s pivot and a series of positives: favorable state election results pointing to policy continuity, US$5 billion in FII inflows, and steady OPEC output easing inflation concerns. These factors drove an approximately 8% rally across major indices in December 2023.
• Sectors: BFSI space (particularly banks) remain our top pick (healthy earnings outlook + reasonable valuations). As near-term valuations in most sectors appear elevated, we selectively favor stocks in logistics, consumption, pharma and auto. We remain on the sidelines in case of IT/Tech stocks on account of valuations in context of imminent slowdown.
• Prior to 2024 General Elections code of conduct kicking in, if GOI issues any rural-population directed sops, then the consumption space (consumer staples, 2W auto and value retail) could offer a tactical play. Prior to 2024 General Elections code of conduct kicking in, if GOI issues any rural-population directed sops, then the consumption space (consumer staples, 2W auto and value retail) could offer a tactical play.
• Gold rose 12% whereas Brent Crude declined 10% in Oct-Dec quarter | In CY23, coking coal & gold prices rallied 24%/14%, steel/aluminium/copper prices ended flat and crude prices dropped 6%.