Direct Equities: Music is still playing, but time to exit the party?

Global equities continued to rally on hopes of a soft landing in the US and expectations of the Fed cutting rates sooner rather than later in CY24. February saw global equities post gains (S&P +3%, MSCI EM +3%), driven largely by tech-related momentum and risk-on sentiment ahead of anticipated US Fed rate cuts, while Indian equities also recorded modest gains but underperformed broader global peers.

Indian equities remained resilient despite increasing calls for a correction from market participants, supported by favorable economic data (inflation and 3QFY24 GDP), strong earnings growth in 3QFY24, robust DII inflows, and stable FII flows (flat versus a US$3bn outflow in January 2024). The Nifty-100 outperformed small and midcap indices, with sectoral gains led by Nifty CPSE (+7%), Nifty Realty (+6%), and Nifty Auto (+6%).

Highlights
 

• In the global context, the narrative for Indian equities remains positive, supported by strong GDP growth, manageable inflation, political stability, and a rising share of FPI inflows driven by India’s increasing weight in multi-country benchmark indices.
• Our market cap preference remains Large > Mid > Small. While flows continue to overwhelm fundamentals, the NSE’s advance/decline ratio has weakened over the past three months, suggesting the broader market may be entering a cool-off phase; although reasonably valued investment opportunities will persist, we recommend profit booking in portfolios, particularly in mid- and small-cap segments.
• Sectors: BFSI remains our top pick, given reasonable valuations amid moderating earnings growth. We selectively favor stocks in logistics, consumption, and auto, while remaining on the sidelines in IT/tech and capital goods due to rich valuations.
• High expectations from IT, metal and realty sectors with implied earnings in FY25 over 16+%.
• In a near-term uptrend, bouts of short rallies/corrections could see the index rising to 23k. Expect a multi-week consolidation thereafter. Downside support levels at 21.9k/21.5k/20.9k.