Nifty and Sensex will go down by about 20% in the year 2024, says Amit Goel of Pace 360

2023 was a great year for the Indian markets. The NSE Nifty climbed 20.03 per cent and the BSE Sensex jumped 18.74 per cent. This is against a 24 per cent rise in the S&P500 index and a 13.7 per cent return in the Dow Jones Industrial Average during the same period.

Amit Goel, Co-Founder and Chief Global Strategist, Pace 360 expects Nifty and Sensex to go down by about 20 per cent in the year 2024, compared to their 2023 close levels and believes that the markets are extremely overvalued at the moment, because of which the downsides are going to open up very soon.

"The next biggest risk for the Indian markets is that the earning expectations are way too rosy for the Indian companies. Should these earnings projections fail to materialize, resulting in underperformance by the corporate sector compared to analysts' optimistic forecasts, it could trigger substantial sell-offs in the Indian stock market," he says in an interview to Business Today. Edited excerpts:

BT: What are your Sensex and Nifty targets for 2024? Could you share the reason behind your targets?

AG: We expect Nifty and Sensex to go down by about 20 per cent in the year 2024, compared to their 2023 close levels and we believe that the markets are extremely overvalued at the moment, because of which the downsides are going to open up very soon. The earning expectation of the market from Indian companies is very much on the higher side and there could be earnings disappointment.

We foresee that by the second half of 2024, we could be entering a global recession, which will have a very big impact on the corporate sector's performance and also the valuations. And thirdly, if you look at the price-earnings ratios of the Indian stocks, they are way higher than the averages of the last ten years and are close to the high points of the range.

We believe the valuations are so rich that they have very little upside, and there is a very good chance that FIIs will become sellers sometime after the first quarter of 2024. This could result in stock prices as well as the valuations going down.

BT: Mid and smallcap stocks outperformed large-caps in 2023. Do you think this outperformance can be sustained in 2024?

AG: We believe that the outperformance of mid-cap and small-cap stocks over large caps is going to come to an end very soon and this could probably happen within the next few weeks because small-cap and mid-cap stock valuations are now extremely rich. They are close to the highest end of the range that the valuations have been in the last 15 years. The large caps have somewhat lower price-earnings ratios.

What holds the view that once the small-cap and mid-cap space goes out of favour, then the valuations would come down very fast and a lot of investors will actually take refuge in the large caps. The money is going to flow from small and mid-caps to large caps sometime in the year 2024 because of this we believe that the small-cap and mid-cap rally is going to end very soon. We could end this year with a cut of about 30 per cent from the 2023 closing levels as far as the small-cap and mid-cap indices are concerned.

BT: Any 3 Nifty stocks that you would think can deliver the best returns in 2024? What are your targets on the stocks and the reasons behind your optimism?

AG: The three Nifty stocks, which we believe could outperform the rest of the large-cap space and Nifty this year are BPCL, SBI, and Dr Reddy.

The reason why we believe that these stocks will outperform is that these stocks are much more reasonably priced than the rest of the large-cap space and t the Nifty stocks. BPCL has a price-earnings ratio of less than 5, SBI has a price-earnings ratio of about 9, and Doctor Reddy has a price-earnings ratio of 19.

We are bullish on them because of their low valuations and because of the quality of the companies and the quality of their earnings, but our price targets are not very high for these stocks. We expect only about a 10% appreciation in these stocks because the market overall is expected to go down this year.

BT: In the run-up to elections 2024, we would have an interim Budget. What would the market be looking at?

AG: When considering the interim budget, we don't anticipate it to be a seismic event this year. Budgets have somewhat decreased in importance due to the implementation of GST. Changes in the GST structure, if needed, can occur at any time, not necessarily around the budget period.

The Finance Minister's scope to introduce extensive changes in any given budget has diminished compared to earlier years. Given that this year's interim budget is merely a vote on account, it holds even less significance than a typical budget. The ongoing discussion and importance of this budget stem from its position as the final budget before elections. There's an anticipation that the government might take measures to bolster their electoral prospects.

Consequently, we expect increased subsidies for rural and urban populations, along with announcements regarding significant infrastructure projects and allocations. Despite these factors, we don't foresee the forthcoming budget to be a pivotal event. It's unlikely to significantly impact the markets, either leading up to or following its presentation.

BT: What would be the three biggest risks for the market in 2024?

AG: The three biggest macro risks for the market in the year 2024 are:

Risks of a global recession- I personally believe the likelihood of a global slowdown or recession in the second half of 2024 is very high, with a probability of around 60 to 70%. This stands as the most significant risk for both Indian and global equities.

Another substantial risk is the potential for Foreign Institutional Investors (FIIs) to become significant sellers in 2024. The global equity markets are anticipated to enter a bear market this year, leading to redemptions in emerging markets. With FIIs holding substantial profits in India, there's a considerable possibility of them initiating selling to secure profits in a market where they still hold advantageous positions.

The next biggest risk for the markets is that the earning expectations are way too rosy for the Indian companies. Should these earnings projections fail to materialize, resulting in underperformance by the corporate sector compared to analysts' optimistic forecasts, it could trigger substantial sell-offs in the Indian stock market.

BT: Is there any sector that you find undervalued or has the potential to deliver solid gains in 2024?

AG: We hold a bullish outlook on oil marketing companies for 2024, supported by several factors. Firstly, this sector trades at inexpensive valuations compared to the broader market, boasting low to mid-single-digit price-earnings ratios and high dividend yields. These factors indicate strong potential performance for the year ahead.

Secondly, I anticipate further deregulation in this sector, leading to healthier returns on equity. Reduced government intervention in price fixing could attract more investors.

Another significant factor is the potential migration of funds from riskier stocks to safer ones like oil marketing companies. Given the overvaluation and potential global slowdown in other sectors, these undervalued stocks may become an attractive refuge for investors. This shift in investment preferences might lead to these companies outperforming the market. I anticipate a potential increase in their prices by around 10% in the upcoming year, outshining indices like Nifty and BSE, especially amid anticipated negative performances from small and mid-cap stocks.

BT: If you were to invest Rs 100 -- all in equities, how much would you invest in large, mid and small caps, given the investor comes under the 20-30 years age bracket and has a moderate appetite for risk?

AG: Out of Rs 100 that we would want to invest in equities for any investor in their 20s and 30s, we would invest 100 per cent of the money in large caps. We would not invest any money in small caps or mid-caps and would choose the safest category of stocks, which have low price-earnings ratios, high dividend yields and reasonably good visibility.

We have this stance due to our belief that the market is currently overvalued, with anticipated downward trends by year-end. Consequently, we prefer to refrain from equity investment in such high-market scenarios. Our preference is to engage in equity investments during significant market corrections, expected multiple times this year, but even then, our focus remains on large-cap stocks.

We prioritize safer stocks with lower downside potential compared to areas where equity prices have surged significantly, potentially carrying higher risks. Thus, our investment approach leans towards high-quality, low-price-earnings ratio, low-beta, and good-earning visibility companies.

 

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