Two risks to equities in 2024 but stay invested and keep some powder dry, says Barclays

One big risk to the Indian market is rise in crude oil prices ahead of brewing tension in West Asia. Though oil price has retreated, it still trades upwards of $80 per barrel.

Even as sustained high oil prices and the general elections in 2024 may be two risks to Indian markets, it will be a good strategy to maintain strategic allocation to equities, while keeping some dry powder available to capture any potential market corrections, believes Barclays Private Bank.

Indian equities have outperformed world markets for another year in 2023, continuing its winning run post Covid 19-led crash. The cautiousness expressed by the investment bank mirrors scepticism over continued outperformance.

“With much of the positive macroeconomic developments already priced in to some degree, and following a solid performance in 2023, investors may need to be more selective in 2024,” said Barclays in its Outlook 2024.

“Rotations across factors, sectors, and themes could be faster and picking out companies that may continue to gain market share, protect profit margins, demonstrate sustainable earnings growth and that are available at reasonable valuations, will be key.”

Much of the gains in the Indian market have come thanks to sustained domestic investment through mutual funds. The trend is likely to continue in 2024, believes Barclays, providing support to the market during the year.

Amidst a strong macroeconomic backdrop, estimated earnings growth for Nifty50 companies for fiscal year 2025 is in the range of 12–13 percent, which is 1–2 percent higher than the expected nominal GDP growth – which is “reasonable”.

In terms of valuation, markets may trade at slightly higher price-to-earnings multiples than the long-term averages, reflecting a more sustainable high earnings growth, Barclays noted. The 10-year average PE of Nifty is at around 23 times. As of November, the Nifty trades at 21 times.

Barclays said from a sectoral or thematic perspective, domestic cyclicals such as infrastructure, capital goods, financials, and consumer discretionary appear well-positioned, as they should be the main contributors to earnings growth going forward. Meanwhile, global cyclicals like metals and technology seem more challenged, it added.

Crude oil price

One big risk to the Indian market is rise in crude oil prices ahead of brewing tension in West Asia. Though oil price has retreated, it still trades upwards of $80 per barrel. India imports a large chunk of its crude oil needs, making any inflationary fluctuation bad news for companies and consumers alike as raw material and freight costs balloon.

“If oil prices remain above $90 a barrel, the current account deficit will probably be higher than expected. That said, financing requirements are unlikely to be a concern, given the positive effects of India's impending inclusion in some of the global bond indexes in 2024, likely prompting some front-loading of debt investment inflows in the first half of 2024,” said Barclays.

“Meanwhile, the government may continue to somewhat dampen the effect of high energy costs by reversing the hikes in excise duty and price cuts to stabilise fuel prices.”