Did you know that 2023 was a year where none of the sectors gave negative returns? If you were invested in the markets throughout the year, you would have surely made money (you must’ve really messed up if you didn’t)!
Even so, with the Nifty 50 up 20% through the year, beating the market would have happened only if you were placed in the right sectors.
It is no surprise that the defence sector came out victorious as the best-performing one. After all, India increased its spending on defence, focused more on capital outlay, peddled hard on indigenisation and even scored some export contracts, propelling the sector to mind-blowing returns.
In hindsight, it seems pretty easy to predict which sectors will do well, whether it was pharma in 2020 (thank you COVID) or metals in 2021-22 due to inflation, but foresight is what really gets you the returns you dream of.
So, what does 2024 look like?
What’s in Store for 2024?
In 2024, we expect the upward trend to continue, given its structural nature. However, we don’t expect 2024 to be as good a year as 2023:
At 24x one-year forward PE, the Indian markets are already trading higher than historical averages, and at a premium against global and emerging equities, which is at its highest ever
With positives around political stability and central bank policy already priced in, there seems to be a lack of surprise for more triggers to help a re-rating
With these factors in place and a re-rating potential diminished, performance for the market would be hinged on corporate earnings, which at 12-14% growth for next year could mean equivalent appreciation.
Where to Invest in 2024?
If we had to make an informed guess on what could do well, we could spread our bets across a few sectors.
1. Chemicals
2023 was a bad year for chemicals due to the global demand slowdown, and prolonged Chinese recovery. In addition to demand woes, high inventories caused excess supply and pricing pressure. Volume and pricing together have resulted in depressed earnings and de-rating.
The underperforming sector has the potential for a massive rebound, led by:
Demand recovery, with a recession being averted in the West, and with the potential of China coming back
Accelerated earnings, driven by the heavy capex undergone by chemical companies, post the pandemic
Higher down-streaming revenue contributes to a better revenue mix, higher pricing and better profitability
2. Technology
Like chemicals, technology services have also been underperforming. With most of the revenue for IT services companies coming from the US and Europe, IT companies saw revenue growth deceleration.
However, the fate of these companies can change for the next year, led by:
Economic revival in the US, resulting in accelerated growth, higher IT spending, and higher revenue growth for IT services companies
Higher proportion of revenue for Indian IT companies from digital or non-discretionary spending could result in lower vulnerability and higher growth
Relative valuations for the sector still appear reasonable compared to the rest of the market
3. Manufacturing
While the first two ideas are more opportunistic, manufacturing as a theme is a structural bet for India, with long-term growth factors.
India has been focused on increasing the share of manufacturing, from the current 15% of GDP. This also turns out to be aligned with global dynamics, with the world looking for an alternative to China, making the sector poised for long-term growth
Government initiatives in the form of PLI, which incentivises companies for capex and export revenue work well in making investments more reasonable, and provide impetus for focusing more on exports
Several focus areas like electronic components, processed food, textiles, auto components and white goods open up multiple opportunities across sectors
4. Banking
A boost in manufacturing requires money to be spent, on capital expenditure. While the government has done its bit in the form of policy initiatives and incentives, the private capex cycle has begun, resulting in strong credit growth.
Throughout the last year, despite high interest rates, credit growth in India was in the mid-teens
PSU banks have been performing particularly well, led by a transformation in how they operate, lower NPAs (from 7.9% in FY18 to 1.3% in FY23), and access to capital. A continual transformation can keep the rally going
Private banks underperformed the markets in the last year, and their valuations seem reasonable relative to the broader markets
5. Power
Just like defence and PSUs, the power sector too is undergoing a massive transformation, throwing out opportunities for investing in 2024.
India aims to achieve 900 GW installed capacity by 2032. A projected Rs. 34 lakh crore investment is expected to fuel this push, and also take non-fossil capacity from 42% now to 70%
This also mandates augmented transmission infrastructure, for which Rs. 1.5 lakh crore is expected to be spent on grids, and efficiency improvement
The entire sector is getting an overhaul - right from generation to transmission to distribution, spurring opportunities in all directions
While foresight isn’t proven till it becomes hindsight, making calculated bets like these is imperative to making more money than your friends in the market (and ultimately, that is what everyone wants)!
Watch these sectors closely, and with your own research, you might just beat us too in the coming year (who are we kidding)!
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