Global growth is projected at 3.1 percent in 2024 and 3.2 percent in 2025. The forecast for 2024–25 is, however, below the historical (2000–2019) average of 3.8 percent, with elevated central bank policy rates to fight inflation, a withdrawal of fiscal support amid high debt weighing on economic activity, and low underlying productivity growth. With disinflation and steady growth, the likelihood of a hard landing has receded, and risks to global growth are broadly balanced.
In the meeting held on 30th January 2024, the Federal Reserve held the policy rate steady in the 5.25-5.50% range wherein they mentioned that they aim to hold off on cutting interest rates until they have more confidence that inflation is headed down to their target of 2%. Based on the current data, there is still a consensus on 2-3 rate cuts by the end of FY24.
India’s election year economy is likely to be a tale of two halves and is on track to growth by 6.5 percent in the fiscal year 2024-25 and will hit 7 percent mark in 2026. Even by the IMF’s conservative estimates, India will emerge as the world’s third-largest economy by 2027, surpassing Japan and Germany, with GDP exceeding US$5 trillion.
India’s retail inflation eased to 5.1 percent on an annual basis in January 2024 as against a 4-month high of 5.69 percent in December. RBI in its first meeting of 2024 decided to keep its key policy rates unchanged and mentioned that they don’t expect to reduce the rates until they see inflation touching 4% on a durable basis.
Interim Budget 2024: Interim budget was largely a continuity of the past policies undertaken by the government with the key highlight being the emphasis on infrastructure development and fiscal prudence which underscore the government’s commitment to economic resilience.
Since October 2023 till 15th February 2024, Sensex has delivered ~9.5% returns whereas Mid-Cap and Small-Caps have delivered ~23.5% and ~21.5% returns respectively. This rally seems to be largely driven by continued domestic inflows along with strong earnings growth witnessed by Mid and Small-Cap stocks in H1’24 driven by improving margins on the back of lower RM costs.
India is currently enjoying the confluence of the best macro and micro tailwinds with ~7% GDP growth, moderating inflation prints, range-bound crude prices, stable currency and resilient corporate earnings. Further, Nifty is trading at a 12-month forward P/E ratio of 19.4x, which is in-line with its long-period average (LPA) even as broader markets trade at expensive valuations.
Markets, in the near term, will take cues from: 1) the outcome of the Lok Sabha elections scheduled in Apr/May’24 and 2) the timing and quantum of easing in the interest rate cycle globally.
Though Q3’24 corporate earnings growth ended on a strong note with outperformance driven by domestic cyclicals like BFSI, Cement, Capital Goods and Auto and was supported by global cyclicals like Metals and O&G along with strong recovery in Pharma sector. However, the earnings (especially in Mid and Small-Caps) seems to be ok which in our opinion may not justify the recent increase in valuations.
In Q3’24 result season, revenues have grown by 4% only but PAT saw a growth of ~28%. Going forward, we expect the margin tailwinds to recede which along with a high base will need healthy recovery in revenues to drive earnings growth.
Care PMS – Top 5 Holdings Performance Highlights (45% of Portfolio)
- JK Paper: The company had strong volume growth which was above expectation. However, margins were lower than expectations on the back of rise in input costs + fall in realisations. However, the performance continues to be amongst the best when compared to industry peers.
- LT Foods: The company has performed as per expectations with ~10% revenue growth along with maintaining the higher margins reported in Q2’24. Further, recent shareholder friendly steps like improving their dividend policy are also positive.
- Arvind: Though the performance was in-line with expectation, future commentary by the management is quite positive with management hinting at margin improvement as well as shifting its focus on growth. Inspite of the sharp run up in share price, valuations continue to be cheap vs peers.
- DB Corp: Strong increase in ad revenues + margin improvement trajectory continued in Q3’24. With central elections near, there is visibility of strong performance to continue atleast for the next 2-3 quarters. Company is performing significantly better as compared to peers.
- Zydus Lifescience: Company continue to perform above expectations for the 3rd quarter in a row. Management commentary for the coming years is also positive. Inspite of the run up in share price, valuations are lower compared to US focused peers like Cipla, Lupin etc.
The New Year 2024 is the time to be cautious and not fearful. Valuations look stretched in certain pockets as reflected in the micro-cap rally and the euphoria in primary issues including the SME segment.
It is very easy to be tempted and go down on quality of stocks during the current phase of Bull Run and hence, we are being very selective while adding new companies and simultaneously increasing our cash percentage as well as selecting companies with favourable risk-reward ratio.
We would like to end the update with the following quote:
“Accept volatility. Don’t anticipate its end” – Morgan Housel
