Could the Sensex Fall to 50,000?

I did not get the number wrong while writing the possible Sensex level in 2024.

I am referring to Sensex 50,000 which is almost 24% lower than where the index is perched today.

Although just a scenario, based on few assumptions, it is not impossible for the Sensex to end 2024 lower than where it is today.

Also, it is perfectly reasonable to expect equity investors to be prepared for a very volatile stock market.

The benchmark index tends to sway wildly in a year when several macros are shifting. And 2024 could be such a year for several reasons.

The problem is most investors today aren't even keen to think about it. They would rather see their stocks nosedive, especially the problematic ones, than prepare for Sensex 50,000.

And this not just about the Indian stock markets or Indian investors. The post pandemic euphoria in global stock markets could possibly take a back seat in 2024.

And I am not the only one who thinks so.

Here's Howard Marks' views on the US stock markets in his October 2023 memo...

• The 13-year period from the beginning of 2009 through the end of 2021 saw two rescues from financial crises, a generally favourable macro environment, aggressively accommodative central bank policies, a lack of inflation worries, ultra-low and declining interest rates, and generally uninterrupted investment gains.
  
  The question, of course, is whether investors should expect a continuation of those trends.

Indian investors may have to contend with some major macro changes in 2024 that could jolt their perception of the stock market risk...

Geopolitics

Russia's preparations for the war were apparent about a year before the start of hostilities. In fact, the writing was on the wall at least a few months before February 2022.

Yet hardly anyone in the financial markets wanted to believe it back then. Up to a few days before the war, people were exchanging memes on social media about how Ukraine hadn't been attacked.

The entire global financial market sentiment changed on 22 February, 2022. It shouldn't have been a shock...but it was. We all remember the carnage that followed in the stock market.

Geopolitics is back to dominating the financial headlines again in 2023. But there is a difference this time.

Financial markets have barely reacted to the Israel-Hamas war.

After the prolonged Russia-Ukraine tussle, geo-political risk in the Israel - Palestine region should have unnerved investors. But it did not.

Also, these are not the only regions posing massive geo-political risks. There are the China-Taiwan tensions too.

But global investors are too optimistic of such wars having very limited economic costs outside the warring states.

Any major hurdles to global trade, because of the geopolitical risks can, however, send market indices spiralling downwards.

Capex Slowdown

Unlike earlier ones, the latest capex cycle in India seems to have solid legs. Events such as demonetisation, RERA, GST and the IL&FS crisis have had their sobering effect, pushing the economy into formalisation.

The pandemic induced changes in the global supply chains have been a tailwind for the China plus one megatrend.

India has been a great beneficiary, especially with the policies like Make in India and PLI (production linked incentive schemes).

Cases of massive government orders in sectors like defence and railways have propelled stocks to historic highs.

To add to that MNCs like Apple resolved to make India the key sourcing hub. This has also brought in a stable tech production ecosystem to the country.

Thanks to the capex overdrive, credit offtake is growing. Corporate balance sheets are cleaner and cash flows suggest higher capex affordability.

However, any capex slowdown in the coming year could be a big jolt to stock valuations that have already priced in the earnings upside.

Election Jitters

Elections not just in India but also in the US could cause severe jitters, albeit temporary, for the stock markets.

Anticipation of key policy changes could keep certain sectors completely out of the radar of investors.

Therefore, stocks in the overvalued zone or with poor earnings could be the earliest casualties of such election led market crash.

Smallcap Fatigue

In bull markets, investors often get used to making quick returns within short span and with less capital.

So, smallcap companies tend to be the favourites of investors hoping to create massive wealth from very little capital. Or hoping to achieve spectacular gains much faster than the rest of the market.

With 2023 seeing a massive rally in smallcaps and penny stocks, the segment remains a favourite. Though smallcaps are inherently riskier, most investors have recency bias about them.

In fact, smallcaps stocks have shown a sharp outperformance versus largecaps in 2023. So, not just individual investors but even institutional fund managers have made a beeline for them.

As per recently released data, mutual funds have been accumulating stakes in several newly listed smallcap firms.

A good yardstick for judging the risk in smallcap valuations is the Smallcap to Sensex ratio. Smallcaps tend to be safer when the smallcap to Sensex ratio goes below the long-term average of 0.46x.

This is a yardstick we consider safe for recommending smallcaps, even to relatively risk averse investors.

The current smallcap to Sensex ratio is closer to 0.57x, way above the long term average. This suggests that any fatigue in the appetite for smallcaps could be a massive risk to key indices.

And it is not just the BSE Smallcap index that could nosedive. The Sensex won't be spared either.

Especially, when investors begin unwinding positions in the stock markets with stocks falling like ninepins.

Reaction to Sensex 50,000

With most of the positives priced in, any negative shocker, especially like the macro variables explained here, could cause a huge dent in the index next year.

Having said that whether that will take Sensex to 50,000 or not is anybody's guess.

What I can say with certainty is that a handful of stocks will be very attractively valued at such levels.

A bunch of smart investors will lose no time in buying their favourite stocks in the watchlist and make the most of the opportunity.

Will you be among them?

Warm regards,


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