2024 promises to be a non-linear market. Here are 3 key reasons why

Keynes would scoff at being quoted while justifying buying power stocks following a hot summer forecast – but that is the nature of the market today.

Look beneath the surface and one can see nervousness. This is driven by 2 reasons. One is fear of missing out and underperforming in a hyper-competitive investment management market. Second, lack of conviction in your process and framework. Such violent mood swings typically indicate nervousness and precede a sell-off. Or at the very least, a volatile phase in the market – I prefer to call it ‘non-linear’ markets – with frequent swings between agony and ecstasy. A few such phases were 2007-08, 2017-18 and now. In each of these periods, investors chased, and churned, brokers made money, and Keynes's quote was oft repeated.

2024 promises to be a . There are 3 key reasons for this . , high and violent mood swings on .

Earnings Risk: In the last 3 quarters, Nifty sales growth has been below par at 6% YoY while growth has been strong. Earnings have been driven by margin expansion due to the crash in WPI. WPI-CPI spread, which was 8ppt in May’22 crashed to -7ppt by May’23 and is now recovering. The resultant margin expansion (as input prices crashed more than final product prices) boosted 1HFY24 Nifty earnings by +25% YoY. As margin benefits are fading, earnings growth reduced to 14% YoY in 3QFY24 and is estimated to be in single digits for 4Q. If sales growth does not revive, the estimated 14% earnings growth (Bloomberg consensus) for FY25 will be at risk.

Earnings dispersion: Despite estimate-beating GDP growth of 8.4% in the December quarter, why was private consumption growth at 3.4%, a decadal low? Logically, when investments rise, employment, income and hence consumption should also rise. But this trickle-down takes time. For now, more resources are being allocated to ‘I’ (investments) at the expense of ‘C’ (consumption). Neelkanth Mishra of explains lucidly in an article in the Economic Times that Indians are too “invested in investments” for now. This has happened before in the previous investment cycle of 2003-07 as the share of ‘I’ in GDP kept rising, the share of ‘C’ kept falling. So, consumer companies have been reporting much weaker sales growth; and as the margin advantage fades away, earnings growth is also now under pressure. Capex driven companies, on the other hand, are doing better. Stock prices are chasing earnings and there is a huge stock performance dispersion now. Nifty is up 3% year to date, but the top 3 performers are up 30% or higher and are from the oil & gas and infrastructure sectors. Bottom 3 in the Nifty are down 15-25%, of which 2 are consumer names. Five of the bottom 10 names are from the consumer sector.

Confusion on interest rate outlook: Hot and cold over the US rate cut outlook resembles the commitment-phobic youth as illustrated in Shahrukh Khan’s 1994 rom-com Kabhi Haan Kabhi Na (literally, Sometimes Yes, Sometimes No). The year started with a consensus of 4 rate cuts in 2024, but after the strong manufacturing ISM data and the estimate-beating US CPI of 3.5%, this view is now down to 2 cuts. A few strategists have swung to the other extreme and now assign a meaningful probability to a 50-100bps rate hike to tame the stubborn inflation. We had mentioned in an earlier article on this page (Why interest rates are the new risk in town) that China +1, climate control, and nationalism are all inflationary. And it will not be so easy to bring inflation down to the 2% target in the US. Markets may have to learn to co-exist with a higher inflation and higher rate environment. But, of course, every ‘haan’ and every ‘naa’ will trigger its own manic-depressive moves.

Markets had learned to ignore the short-term information noise and focus on the long term. But this has changed, and ‘news flow’-driven volatility is now common. This is perhaps due to the dominance of retail investors. Retail investors today are the price-setters (average daily traded cash equity turnover is >Rs1tn, 2.5x the pre-COVID average!) and institutions are the price takers. Institutions resisted the temptation to respond to these frequent changes in ‘new’ information for long, only to realize that return retention is becoming difficult as stocks enter prolonged periods of decay. Institutions have joined the churn party. There is nervous excitement on the dance floor. Many do not want to participate but are unable to resist.

As Wham crooned in their 80s mega hit, ‘Careless Whisper’

… Tonight the music seems so loud
I wish that we could lose this crowd
Maybe it's better this way….