Back to basics in uncertain times; quality to outperform momentum

The global backdrop is also changing rapidly. The world is moving from to protectionism. are likely to remain elevated. Fiscal stimulation will recede. Environmental considerations, along with technological disruptions, will adversely impact many businesses.

There are some positives which the market will keep in mind. Higher is translating into higher . FY 24 Nifty 50 earnings were 3% higher than anticipated at the beginning of the year. FY 25 and FY26 Nifty 50 earnings is likely to witness double-digit growth. The earnings are broad-based, with financial services contributing disproportionately, while IT and chemicals are subdued.

While geopolitical risks exist in the , Eastern Europe, and the South China Sea, there is no adverse impact on the supply or price of crude oil. The announcement by OPEC and Russia to restore production cuts will keep Oil prices under check. The Fed Rate cut has been deferred from mid-CY23 to the end of CY24. The market believes that the Fed rate cut is a question of when and not if.

With fundamentals in place and if domestic flows remain strong then markets can look to bottom out once there is clarity on government formation. Foreign investors have booked profits in this financial year but will be buyers at lower levels as they are 'equal weight' to India in their portfolios.

The market-cap-to-GDP ratio is well above historical averages. Elevated corporate profit-to-GDP ratio and the deleveraged balance sheet have kept valuations from becoming expensive.

Corrections are setting in in parts of the market where floating stock is low and valuations are high.

The post-Covid bottom market has delivered returns well above the trend line, especially in small- and mid-caps. We expect returns to moderate as valuations weigh in, especially in the bottom-half of the market cap. stocks will outperform stocks. Low floating stock counters will correct further if more supply emerges. The de-rating cycle of and private banks seems to have bottomed out. Election spending and a good monsoon can support consumption. Valuations in IT and chemicals are factoring in the current challenges. The market will watch for the June quarter commentary on order flow in IT and Chinese competition in the chemical sector.

Election-related volatility will eventually settle down, but the outcome not turning out as per the market's expectations will reset the base. While traders will have their opportunities, we expect investors to make more money.

Our economy and corporate profits will expand multiple times over the next decades. Stocks, being slaves of earnings, will move in the same direction.