Nifty50 @24,400 mark – Searching for a new narrative

This article is authored by Viral Shah, Head Brokerage, 360 ONE Wealth

The equity markets often have a knack for anticipating and pricing in trends before they are visible in the broader economy. The breakout of the NIFTY in late 2023 is a prime example. The unexpected success of the ruling party in the five state elections earlier in the year created a powerful narrative, fueling widespread expectations of their victory in the 2024 general elections. This wave of optimism drove the NIFTY from a post-election level of around 18,800 to over 25,000—a remarkable surge of approximately 35 per cent.

Several key factors underpinned this remarkable rally
A stable government at the centre ensured continuity in policies focused on infrastructure, capital expenditure, defence, and railways. The timing was also fortuitous, with peak interest rates in most developed markets, a budget that signalled fiscal discipline, and strong corporate earnings driven by improved volumes and stable margins. The market, in its usual manner, had already discounted these developments, pushing valuations higher.

However, as we moved into the months of June, July, and August 2024, the market narrative became more complex. The assumption of a single-party majority gave way to a BJP-led coalition, leading to a shift in government focus towards job creation and rural development over infrastructure. Additionally, an increase in taxes, rationalisation across asset classes, and global challenges like the Yen Carry trade, an inverted yield curve, and political disturbances in several countries gave the market some jitters. The market regulator mandating stress tests for small caps and proposing a reduction in retail participation in derivatives, though in the best interest of retail investors, also added to the wait-and-watch approach by some investors.

In such a scenario, where positives and negatives are vying for dominance, the Nifty price-to-book (P/B) ratio is approaching the upper end of the spectrum. With most of the anticipated market catalysts for 2024 already in play, the market is now in search of a new narrative to sustain its upward momentum. Traditionally, after such a significant move, markets tend to take a breather, and a period of time-based correction could be on the horizon until fresh narratives emerge.

What next

Expecting another 30 per cent+ move in the NIFTY for two consecutive years might be overly optimistic. However, potential narratives that could drive the markets higher in H2FY25 include a global soft landing and lower interest rates, a strong performance by the ruling party in the upcoming assembly elections, recovery in rural demand following favourable monsoon rains, a resurgence in private capital expenditure leading to increased consumption, and the potential for lower interest rates in India.

The latter half of FY25 promises to be intriguing, as early signs indicate that smart money is already aligning with these emerging themes. While the indices may remain range-bound as the market takes a breather, specific sectors and stocks could stand out, benefiting from these new narratives.

In the context of rural demand, sectors like fertilizers, agri-based chemicals, tractors, two-wheelers, and jewellery may see a resurgence. The onset of a lower interest rate cycle could boost real estate, non-banking financial companies (NBFCs), and financials. A revival in private capital expenditure would likely favour cement, steel, engineering, procurement, and construction (EPC) companies and non-ferrous metals. Meanwhile, an uptick in consumption could benefit consumer staples, consumer durables, quick-service restaurants (QSR), textiles, and oil marketing companies (OMCs).

Many of these sectors have underperformed for a while, as the market's focus had primarily been on infrastructure-related sectors like defence, capital goods, and railways. However, capital allocation towards the new narrative of "local-consumption-centric themes" might offer attractive risk-reward opportunities over the next 12-18 months.

India at the centre

It's also worth noting that Indian markets have outperformed most Asian peers and developed markets. As we approach the anticipated rate-cutting cycle of the Federal Reserve in September 2024, there could be a decline in the dollar, which might create tailwinds for sectors such as commodities, bullion, emerging market equities, and emerging market currencies. Indian companies stand to benefit from this global rebalancing if the dollar weakens. While the market searches for a new narrative, it would be prudent for investors to focus on domestic themes where the variables are fewer, and valuations remain reasonable, providing both capital protection and appreciation.