Which Sectors Will be the Biggest Gainers in 2024?

2023 has been a rare year for smallcap investors.

One out of every four stocks, among the 950-odd stocks in BSE Smallcap index, have turned multibaggers.

Truth be told, this was no surprise to investors who track the Smallcap to Sensex ratio carefully for years.

My colleague Richa Agarwal, who leads the smallcap research initiative at Equitymaster, was quite optimistic in December 2022. Back then, she reminded us that the Smallcap to Sensex ratio was below the long-term average of 0.46 times.

Turns out, most stocks in the BSE Smallcap index behaved exactly the way she expected them to in 2023.

As I write this, the BSE Small Cap index is up an impressive 45% for the year and counting. Smallcap to Sensex ratio is above 0.57 times.

But can the euphoria continue?

Well, going by the indicator Richa swears by, betting big on smallcap stocks at current levels is akin to gambling.

Not only is the Smallcap to Sensex ratio well above long term average. But also, most good quality smallcaps are near their lifetime high valuations.

This means holding on to very risky or very expensive smallcaps can only exacerbate one's market risks.

Of course, an investor can continue to be careful about few smallcaps held in the portfolio. But fresh and existing allocation to smallcaps need to be well calibrated.

Also, smallcaps are not the only outperformers of 2023.

Stocks from the defence, railways and electric vehicle sectors also found their place under the sun.

Stocks of the largest public sector entities in defence and railway sectors fetched handsome gains every time the government ordered more spending.

But there were also plenty of private sector entities in defence ecosystem that commanded premium valuations.

The EV sector became a stock market favourite in 2023. This was especially as Indian auto makers promised new assembly lines to produce the electric vehicles.

But the government's changing stance on the FAME subsidies kept investors on the edge for a while.

I'm sure you've wondered, what comes after the big-ticket gains of 2023?

Will the stars of 2023 continue to shine in 2024? Or should you consider a different set of potential wealth creators?

Well, going by the steep valuations most of these stocks now trade at, investors must be prepared for some correction in the near term.

But markets in 2024 will factor in the General elections, the US elections, US Fed rate cut (if any), geopolitics, and India's GDP growth.

2024 Could be the Year of...

• Solid Bluechips

  With steep rise in smallcap valuations in 2023, most of the FII investments in Indian stocks next year are expected to come into safe bluechips and midcaps.

  Even the government spending in the election year is expected to offer substantial projects to large entities.

  So bluechip stocks that have languished through most of 2023 could be the flavour of 2024.

• Ignored Stocks in Defence, Railway and EV Ecosystem

  Looking at frontline defence, railway and EV stocks without considering their ecosystem is the biggest mistake investors make.

  Rather, a careful study of each of these ecosystems will allow investors to spot stocks that are undervalued but can ride these massive megatrends.

  Container Corporation, for instance, is expected to be a major stakeholder in the PM Gato Shakti investments as well as the Railways' investment in cargo terminals.

  However, the concerns over near term margin pressures has capped the stock's valuations.

  Similarly, there are stocks like Tata Elxsi, KPIT and Tata Tech, which are not EV producers, but offer the backbone of EV technology could find more takers.

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• Critical Infrastructure Stocks

  Critical infrastructure like data centres that could see massive investments in the years ahead could be the focus of the stock markets next year.

  India's data centre inventory is likely to double to about 20 million square feet (msf) by 2025 from the current 10.3 msf with the advent of 5G, increased multi-cloud usage and data localisation.

  India currently has about 770 megawatts (MW) of data centre capacity across the top seven cities. Over the past decade, the data centre stock in India increased by 59%.

  While we believe the data centre market is a lucrative opportunity , it may take a while to find credible businesses that are actionable opportunities.

• Deeptech Stocks

  Deep tech, or deep technology, refers to those startups whose business model is based on high tech innovation in engineering, or significant scientific advances.

  There are two kinds of investing opportunities here.

  Deeptech startups looking to raise funds for research on innovative technologies may continue to line up for IPOs in 2024.

  Further, several bluechips will continue to invest in or buy stakes in deeptech startups focused on AI, robotics, 3D printing, quantum computing, blockchain, space tech etc.

Rest assured, our view on 2024 stock markets is not based on speculative bets.

Rather...

• We track the market and individual stock valuations versus historical averages.
• We have conversations with managements at quarterly concalls.
• Study the capex plans announced in annual reports and presentations.

Based on these, 2024 appears to be a year of volatility.

However, there will be plenty of long-term opportunities for investors who are careful in allocation and patient in their outlook.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)