Kotak says mega caps valuations are reasonable but sees low market returns in general as India heads for elections

Kotak expects some of the large-cap laggards of this year to do better in 2024, as their valuations are quite reasonable. It also noted that the valuations of narrative-based mid-cap and small-cap stocks may eventually realign with fundamentals.

"The mega-caps are in a bear market, with many large-cap stocks delivering modest positive negative or moderate negative returns in the last two to three years; the large-caps and high-quality mid-caps are in a bull market, with the weak operating performance in the short term and likely deterioration in fundamentals in the medium term being largely ignored by the market; and several low-quality mid-caps and small-caps in general are in a bubble market, with the market attaching unrealistic narratives to many stocks," it said.

An eventful period ahead

Among several factors in the next few months that is expected to set the course of global and Indian markets in the first half of calendar year 2024 (H1CY24) include:

"The market’s expansive mood and expensive valuations would suggest that it does not expect any negative surprise in the general elections with no change in the central government and the central government’s economic policies," Kotak said.

Three state elections in Chhattisgarh, Madhya Pradesh and Rajasthan will likely provide some indication of the sentiment among voters. However, Kotak noted that the state and general election outcomes need not have any correlation.

Further, it listed two challenges as the brokerage tries to get ahead of these events — the outcomes of the events are uncertain and the final outcomes can be different from market expectations.