Citigroup's Outlook for India in 2024: "Crazy" Stock Market or Continued Performance Depends on This Result

India has become the "darling" of global investment this year, with better-than-expected economic growth and a soaring stock market. Its market value has surpassed $4 trillion, and the Nifty 50 has risen nearly 18% year-to-date, heading towards an unprecedented eight-year streak of gains. As we enter 2024, can the Indian economy withstand the market's "favor" and continue its upward trajectory?

In early December, Citigroup's India Economic Team, along with its Equity and Fixed Income Strategy Team, released a report titled "India 2024 Outlook - Shining Through the Fog of Elections," providing an outlook on the performance of major asset classes in India in 2024:

Fundamentals: With the retreat of adverse factors such as rising global interest rates, a strengthening US dollar, and higher oil prices, the Indian economy will continue to maintain strong growth. India's GDP for the fiscal year 2024 is expected to reach 6.7%, but it is projected to slow down to 6.2% in the fiscal year 2025 due to the global economic slowdown.

Indian Stock Market: For 2024, we anticipate strong earnings growth prospects and maintain a constructive view on the Indian market. The target price for NIFTY2024 in December 2024 is 22,500 points, with a forward P/E ratio of 19 times, representing an approximately 5% upside potential from the current level. Although foreign capital has poured into the Indian stock market this year, Citigroup's index shows that India's overweight position in investors' emerging market portfolios has decreased.

Indian Bond Market and Rupee: Global nominal interest rates may decline, and a US economic recession is looming. Indian policies are likely to protect Indian assets from the headwinds of safe-haven and deleveraging, and gradually reduce interest rates. We expect yields to eventually decline, while the Indian rupee will remain stable.

It is worth mentioning that 2024 is an election year in India, and the election results will have an impact on the performance of various assets, including Indian stocks. However, Citigroup currently expects the ruling party led by Prime Minister Modi to have a higher probability of winning, maintaining what is known as political continuity and minimizing risks to the market.

Fundamentals: India's GDP for the fiscal year 2025 may decline to 6.2% due to the global economic headwinds

Citigroup points out that as adverse factors such as rising global bond yields, a strengthening US dollar, and higher oil prices recede, India will continue to deliver strong performance. The easing of inflation will provide room for accommodative monetary policy. However, as the external and domestic demand environment experiences a cyclical softening, the pace of economic growth is expected to slightly slow down in the fiscal year 2025.

Despite facing external headwinds, India's economic growth in 2023 exceeded expectations, and the risks brought by the results of the national elections in 2024 seem relatively low. This has reignited hopes for improved capital flows and a recovery in private capital expenditure. The emerging global headwinds are likely to cause a 70 basis point decline in global economic growth to 1.9%, while the US economy is on the verge of recession.

For India, we expect its GDP growth rate to moderately slow down from 6.7% in the fiscal year 2024 to 6.2% in the fiscal year 2025 (from April 1, 2024, to March 31, 2025). Despite headwinds in domestic and external demand, there is still hope for a capital expenditure recovery. Meanwhile, India may lower its fiscal deficit target for the fiscal year 2025 to 5.6%, but the medium-term target of 4.5% remains challenging.

The general easing of inflationary pressures and the decrease in pressure from a stronger US dollar will allow India to gradually lower its policy interest rate starting from the mid-term of 2024. The Reserve Bank of India may gradually relax its monetary policy and implement the first interest rate cut in June 2024. If the overall CPI averages decrease to 4.5% in the fiscal year 2025, it should be sufficient for the Reserve Bank of India to cut interest rates by 50 basis points starting from the mid-term of 2024.

Regarding the impact of the elections on the economy, Citigroup pointed out:

In the recently concluded state elections, the ruling party led by Prime Minister Modi performed strongly, increasing the likelihood of winning the 2024 general elections. This strengthens market expectations for policy continuity and may contribute to positive sentiment in the stock market and growth in private sector investment.

Indian Stocks: Positive Outlook for Profit Growth Maintained

For the Indian stock market, Citigroup expects strong prospects for profit growth in 2024 and maintains a constructive view on the Indian market. The target price for the NIFTY index in December 2024 is 22,500 points, with a forward P/E ratio of 19 times, implying a potential upside of about 5% from the current level.

In terms of relative and absolute valuations, Citigroup points out that the valuation of the Indian stock market is higher than the long-term average, but considering the relative growth elasticity and challenges of other emerging market countries, this is reasonable. Citigroup/consensus expectations project a 17%/20% growth in earnings per share for the NIFTY index in the fiscal year 2024 and a 14%/15% growth in earnings per share for the fiscal year 2025.

In terms of sector allocation, Citigroup maintains its stance on various sectors:

Overweight: State-owned utilities/defense, industrials, and banks/insurance; Underweight: Consumer goods, IT services, metals.

Large-cap vs Mid-cap: Prefer large-cap stocks over mid-cap stocks. However, funds have started to flow more towards mid-sized companies, and this trend may continue.

From the perspective of capital flows, domestic capital inflows in India remained strong in 2023, and the inflow growth of Systematic Investment Plans (SIP) improved after slowing down in 2022. Meanwhile, foreign capital inflows in the first half of 2023 amounted to approximately $14 billion, compared to an outflow of about $17 billion in 2022. Citigroup pointed out:

We have previously emphasized that the large inflow of domestic capital in the country has reduced the volatility of the Indian market and led to a revaluation of valuations over the past decade.

From March to July 2023, a total of approximately $35 billion flowed into emerging markets, with India attracting over 50% of it. From August to October 2023, $50 billion flowed out of emerging markets, with India accounting for about 6% of it. This indicates a relative preference for India by foreign capital.

Although India's allocation in emerging market funds has increased, according to our regional team's data, India's overweight position in emerging market portfolios has gradually decreased and is now close to neutral. At the same time, India's weight in benchmark indices has further increased.

Looking ahead to the Indian market's trend next year, Citigroup pointed out five aspects to pay attention to:

a) Consumption: Short-term growth may continue in a "K-shaped" manner, and attention should be paid to the breadth of consumption growth foundation.

b) Capital expenditure: Public capital expenditure will maintain its growth momentum due to strong corporate balance sheets, cash flow generation, and favorable policy environment, while private capital expenditure is expected to gradually improve.

c) Elections: The results of the general elections will be closely watched, and the results of state elections have reduced the tail risk of unexpected events.

d) Credit growth: It is expected to slow down in the future, and trends in unsecured loans need to be closely monitored.

e) Capital flows: India is in a favorable position among emerging markets, and the surprising inflow of domestic capital is noteworthy.

Indian bond yields to decline, rupee may remain stable

Regarding Indian bonds and foreign exchange, Citigroup pointed out that as the Indian general elections begin and key bond indices include India, Indian bond yields are expected to eventually decline, and the Indian rupee may remain stable.

Global nominal yields may slow down, and a US economic recession is imminent. India's policy mechanisms and external buffers will largely protect Indian assets from the headwinds of safe-haven/deleveraging, coupled with the possibility of India gradually easing policies. We expect yields to eventually decline, while the Indian rupee may remain relatively stable.

Furthermore, Citigroup pointed out that tight fiscal policies and loose monetary policies provide conditions for declining yields. Foreign direct investment inflows of over $25 billion contribute to the decline in yields, and by the end of the year, the yield on India's 10-year government bonds may approach 6.5%.

The Indian rupee is likely to remain stable, according to Citigroup:

In recent months, market forces and actions by the Reserve Bank of India have kept the exchange rate within a narrow range. Possible remedies are aimed at preventing the transmission of occasional inflationary pressures caused by surges in commodity prices and mitigating financial risks for companies with unhedged foreign debt. However, the more typical and structural factors that suppress currency volatility are the Reserve Bank of India's preference for accumulating dollars and a potential inclination towards rupee depreciation.

Citigroup warns that two important events may impact the trajectory of the rupee:

1. Inflows after inclusion in key bond indices: It is expected that the Reserve Bank of India may utilize these inflows to enhance foreign exchange reserves, especially considering the overall skepticism towards fixed income inflows. This could mean that India may take measures to strengthen foreign exchange reserves and stabilize the rupee exchange rate when funds flow in.

2. Election results: If policy stability during the elections leads to a brief rebound in the rupee, it may reflect market optimism towards policy stability. Considering this scenario, we will explore trading opportunities for the relative value of the Indian rupee against a basket of currencies such as the Singapore dollar.