Health of Wealth—Dec 2023

1. US FED, to cut rates this year 2024.

Interest rates are likely to be cut 3 times in the year 2024.

IMPACT: POSITIVE

According to minutes from the FED officials’ meeting, members indicated that they expect 75 bps rate cuts by the end of 2024. However, the meeting also indicated a high level of uncertainty about the happening of the same.

The rate-setting Federal Open Market Committee agreed to hold its benchmark rate steady in a range between 5.25% and 5.5%.

Presently, the inflation in the US is under control and the economy is also quite strong. Therefore, rate cuts would not be necessary as long as there are no worries about inflation or economic growth in the US.

However, cutting interest rates would not just relieve the Americans from the tough borrowing costs but would also lead to higher foreign investment in Indian markets.

2. Big Bubble forming in the SME Segment.

Funds raised through SMEs’ IPOs were at a record level in 2023.

IMPACT: NEUTRAL

Small and Medium Enterprises (SMEs’) IPOs have seen a record run in the last year. There were 181 companies that raised Rs. 4,643 crores through the SME IPO route.

The BSE SME IPO index, gauge tracking companies in the BSE SME platform, has risen 96% in CY2023. Furthermore, the SME IPO index in the past 2 years has moved from 1,396 to 46,529 giving staggering returns of 33x (approx.).

Despite the positive trend, it is important to note that there is always an element of high investment risk in the SME segment. SME stocks can be more prone to price fluctuations.

As there is less float and low liquidity in this segment, there is a high probability of a bubble to form that we are seeing now.

Hence, Investors are advised to be cautious because it is uncertain how many of these companies would be able to produce long term wealth or rather it is even better to exit at the current levels.

3. The Current Account Deficit falls to 1 % of GDP:

There is an improvement in Current Account Deficit (CAD) numbers for the July-Sept Quarter of FY23-24.

IMPACT: POSITIVE

The current account deficit for the September quarter narrows to $ 8.3 billion, which is around 1 % of the GDP.

These are the improved numbers from $30.8 billion (3.8% of GDP) a year ago in Q2FY22-23 and $9.2 billion (1.1% of GDP) in Q1FY23-24.

This sharp decline is mainly due to a lower merchandise trade deficit and growth in services exports.

As per RBI, services exports grew by 4.2 percent YoY on the back of rising exports of software, business, and travel services.

The RBI also mentioned that external commercial borrowings recorded an outflow of $1.8 billion in Q2FY24, compared to a net outflow of $0.5 billion a year ago.

Hence, this narrowing deficit is an encouraging sign for India’s economic growth and prospects for a more balanced current account position.

4. The Dominating Magnificent Seven Stocks!

The Market-Cap of Magnificent Seven Stocks roughly equals the combined value of the UK, Japan, and Canada’s Stock Markets.

IMPACT: POSITIVE

The “Magnificent Seven” - Amazon, Apple, Alphabet, Meta, Nvidia, Tesla, and Microsoft are valued at $11.7 trillion as the year 2023 ends, which is about equal to the UK, Japan, and Canada's stock market.

These highly influential stocks of the technology sector have lived up their names in 2023 with big gains. They are among the best stocks to buy and watch in the stock market now.

However, given the seven stocks accounting for most of the gains in the S&P 500 last year, with the rest of the index trading relatively flat and their monster returns of 107 %, there have been now worries that the market may see a speculative AI Bubble grow, making mega-cap stocks like Microsoft, Amazon, and Nvidia overvalued as the investors chase the hype.

5. India’s current Market-Cap to GDP Ratio stands at an all-time high.

India’s current Market-cap to GDP Ratio stands at 131 % at the end of 2023, becoming the most richly valued among major markets.

IMPACT: POSITIVE

Indian market is becoming one of the most richly valued amongst the global markets. Nifty50 PE ratio is 22.3, and EPS Growth is 17%. PEG ratio comes out to be 1.31, which is quite high.

The growing Indian economy and the robust corporate earnings can be attributed to the high valuation.

Investors are highly optimistic about the future growth prospects of Indian companies, and the low-interest rates in India have made borrowings cheaper, which has led to an increase in investment and subsequent growth.

The Current India Market Cap is approx. $3.93 Tn, and the current GDP is approx. $ 3.01 Tn. Hence, the current Market-cap to GDP ratio for India stands out to be at 131% indicating that the market is overvalued. However, the ratio is not the perfect indicator of market valuation.