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Updated December 30th, 2023 at 14:32 IST

Revival in corporate credit off-take could drive bank earnings in 2024: Quantum AMC

Despite above-average valuations, the positive outlook on equities over the medium term is driven by a favourable earnings cycle.

Abhishek Vasudev
Rupee
Rupee | Image:Freepik
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The benchmark indices, Sensex and Nifty, exhibited robust growth in 2023, which has been a phenomenal year for the Indian equity market. The indices gained 18.73 per cent and 20 per cent, respectively.

The surge translated into a staggering Rs 81 lakh crore increase in investor wealth. The stellar performance was underpinned by a confluence of factors that contributed to the market's remarkable ascent.

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Key drivers of the equity market's success included India's robust macroeconomic fundamentals, bolstered by positive political stability following Bharatiya Janta Party's (BJP) victories in state elections. Additionally, an optimistic outlook on corporate earnings, indications of potential rate cuts by the US Federal Reserve in 2024, and crucial participation from retail investors all played crucial roles in the market's phenomenal performance.

In the final trading session, the Sensex settled at 72,240, and the Nifty 50 closed at 21,732-level.

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This wealth creation is attributed to various factors, including the assurance of political stability due to impending elections, positive signals of potential rate cuts in the coming year, and a decline in energy prices that enticed foreign investors to re-enter the market.

However, the overall outlook for the Indian equity market remains optimistic, with the remarkable gains in 2023 setting a positive tone for investors as they enter the new year.

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Meanwhile, investors are advised to be selective, considering the favourable earnings cycle and stellar returns in most sectors, said Quantum Asset Management Company’s George Thomas and Christy Mathai in a note.

“Two promising sectors, Banks and IT, are identified for their relatively muted returns and potential improvement in earnings trajectory. A favourable credit cycle and a potential revival in corporate credit off-take could drive bank earnings, while a likely soft landing in the US may expedite revenue conversion in the IT sector. These sectors could also benefit from a reversal in FPI flows,” said Quantum AMC.

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“Small and mid-cap stocks have recorded better returns compared to earnings growth, partly due to higher flows into these categories. Despite historically lower returns, large caps appear favourable on a risk-reward basis,” Quantum AMC added.

Despite above-average valuations, the positive outlook on equities over the medium term is driven by a favourable earnings cycle and policy stability. While valuations may seem stretched, reasonable earnings growth in the medium term could justify them over time, Thomas and Mathai said.

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“The domestic economy is robust, and global economic stabilisation is expected as interest rates embark on a downward trajectory. The anticipation of policy continuity during election years is likely to limit volatility. Although a significant correction seems unlikely, staggered investments are suggested to capitalise on any near-term volatility,” Quantum AMC said.

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Published December 30th, 2023 at 13:32 IST

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