Nifty to consolidate ahead of 2024 Lok Sabha election; check investment strategies, sectors to bet on, analysts’ top picks

Indian market outlook: The domestic equity market had a spectacular run between May and July 20 of the current financial year 2023–24 (FY24). The key indices, S&P BSE Sensex, NSE Nifty, and Bank Nifty, witnessed a series of record high levels during the period before retreating from the zenith. The broader market indices, on the other hand, continue to rally. Both indices, the S&P BSE Midcap index and the S&P BSE Small Cap, hit fresh record high levels in today's session (August 22) as well.

The long-term outlook of equities remains intact, given an array of positive factors such as strong FPI inflows (around Rs 46,600 crore in July, while MFs continued to be net buyers worth 7,700 crore in July), India being the fastest-growing economy, softening commodity prices, pick-up in credit growth and strong bank balance sheets, capex revival with the infra push, PLI, China+1, digitisation, etc. However, in the short term, the market is expected to face major headwinds.

The coming months will be a real test for the Indian economy and markets given the El Nino impact on crops and inflation, as food inflation has spiked to more than 7.4 per cent and the rainfall outlook remains subdued. Secondly, there is a dim possibility of further cuts in interest rates with some possibility of an increase in 2H, notes Prabhudas Lilladher in its report issued on August 21.

"We expect markets to start factoring in political risks as election-related activity picks up with state elections in November and Lok Sabha elections in April 2024. The economy is getting a big push from the Union government-induced capex even as rural India is showing faint signs of recovery and urban discretionary demand remains tepid. The expected interest rate hike in the US and its impact on the INR/USD, with impending political and inflation risk, can impact capital flows," the report adds.

The brokerage believes that high inflation can be a political hot potato in an election year, forcing the government to slow down capex.

ICICI Securities, in its August note, highlighted that India's market cap to GDP is currently higher than the long-term average of around 78. "While we have a long-term positive view on equity, there is an expectation of heightened volatility in the short term due to high valuations, rising geopolitical tensions, and hawkish measures from global central banks to mitigate the rising inflationary pressures, especially in the US," it said.

How to navigate markets in the current scenario

Analysts suggest investors adopt a stock-specific approach and avoid sectors or companies with weak fundamentals and a lack of business moats. They suggest that the allocation to equity can be made in a staggered manner over the next three to six months, while corrections in Nifty to 19,000 levels can be used for making lump-sum investments.

Investors, as per analysts, can also increase allocation through SIP or increase deployment in case of market corrections and continue to allocate funds to multi- or flexi-capital funds focused on blended investment (mix of value and growth) styles of investment and dynamic asset allocation funds. Additionally, allocation towards mid- and small-caps can be increased, they suggest.

Prabhudas Lilladher remains positive on auto, banks, capital goods, and healthcare sectors. It said, "We cut the NIFTY target to 20,735 given the cut in earnings (the impact of floods and late Diwali in 2Q) and expect markets to consolidate ahead of the 2024 elections.

The brokerage has added SBI, Gujarat Gas, and Navneet Education to its high-conviction buys and has removed HDFC Bank from the list. It has replaced Sumitomo Chemicals with Greenpanel in contra picks. It has also introduced Sell Ideas with Divi's Labs and Deepak Nitrate.

Analysts at IDBI Capital note that Nifty50 made an all-time high in July'23 and trades at 16x / 19x FY25E / F24E earnings per share (EPS) which is a 5-7 per cent premium to historical averages. Sector-wise, EPS upgrade is seen for Banks, BFSI, and construction and EPS cut is seen by IT, Metal, Energy, and Chemical. 

The brokerage's top picks include TCS, HDFC Bank, SRF, APL Apollo, Birla Soft, City Union Bank, NCC, Prince Pipes, Safari Industries, HG Infra, Rolex Rings, and Mold-Tek packaging.

(Disclaimer: The stock recommendations given here are by market experts. These are not the views of Zee Business. Kindly consult a professional adviser before making any investment decision.)