2024 Ahoy! Stock market thrived in war but apprehensive of polls ahead

In 2023, stock markets around the world may have succeeded in achieving a Zen-like stoic despite wars and disruptions around the world. Even though it proved to be a phenomenal year for global stock markets, it may be better to err on the side of caution in 2024 as over 40 nations undergo elections in the year, right from the world's largest democracy, India, to the world's mightiest democratic nation, the US.

In 2023, the world economies were torn with armed conflicts between Russia and Ukraine, Israel and Hamas; subjected to geo-political stunts by the Shanghai Cooperation aiming to dethrone the dollar; endured the logistical nightmare of navigating war zones to continue international commerce. Yet, the stock markets were like a safe haven for financial growth.

Detached from the real world, markets all over the world thrived in the hope that the US Federal Reserve will pivot and start cutting down the rates in 2024.

Looking back at the year that was, the behaviour of stock markets indicated that money has once again started flowing towards speculative or financial economy rather than real economy based on productivity and consumption in the tangible realm.

As for India, it is the only major economy that may still boast of a GDP growth of over 6% when the rest of the developed and developing world is facing economic slowdown. The world's most populous country claiming a growth of over 6% provides a major hope for producers and service-providers around the globe.

Stock markets in India and rest of the world are on a record breaking spree    

The Indian stock market index, Nifty 50, crossed the 21,000 mark in December 2023, displaying the exuberant buoyancy infused by about 13 crore demat account holders in the country. Nifty 50 has gained over 19% in this calendar year as the Index closed at 18,105 in December end 2022.

Not only Indian Index, even the much followed Nasdaq 100, which includes 100 of the largest non-financial companies listed on the Nasdaq Composite staged its blockbuster performance in 2023 by gaining over 55%. Hype around the potential of artificial intelligence acted as a catalyst for Nasdaq 100 that made a new all time high by crossing 16,900 in December 2023. Also, the Dow Jones Industrial Average gained almost 14% this year. The Dow Jones closed at 37,710, a record high on December 28. The S&P 500 is trading just a few points away from its all time high of 4,796 extending its 2023 advance to 25%. German Index Dax 40 too gained over 20% and made all time high in December 2023. In February 2023, Britain's blue chip Index FTSE 100 made an all time high by crossing 8,000 despite grim economic and business backdrop in the country.   

Even the most sluggish of all, the Japanese Stock Market Index- Nikkei 225, surged 29% in 2023. The Index ended 2023 at 33,464 which is the highest level since 1990. Nikkei 225 made an all time high of 38,195 on December 29, 1989.

Among the big markets, only China and Hong Kong missed out on the stock rally. China's blue chip Index CSI 300 posted a loss of approximately 12% while Hong Kong;s Hang Seng Index lost approximately 14% in 2023.

What does 2024 look like?

The main ingredient for resiliency and buoyancy of the stock markets on the face of global conflicts was the presumed victory over inflation that the central banks, all over the globe, had been fighting. As per the International Monetary Fund (IMF), inflation is likely to ease to 6.9% in 2023 from 8.7% in 2022, on the global scale.

The feel good optimism led investors around the world to hope for interest-rate hikes to cease or diminish. If the trend continues, the stock markets should continue to rally as well.

However, 2024 also brings further complications to the table in the form of national electoral politics. More than 40 countries will undergo elections in the coming year, including the US and UK. In the Indian subcontinent, apart from India, Bangladesh and Pakistan will also face general elections.

Amongst the major factors that decide upon the flow of funds into the Indian stock market are the composition of the next union government in India and the decision of the US Federal Reserve pertaining to rate cuts.

Historically, whenever, Fed cuts rates, money from developed markets starts flowing towards growth markets like India. After the Pandemic in 2020, Fed cut rates and ran loose monetary policies for many quarters that aided flow of hot money towards Indian equities.

In 2023, until December 28, foreign institutional investors (FIIs) had poured in ₹1,65,450 crore, or $20 billion, into the Indian equities, as per NSDL. This is the second highest flow to Indian equities after 2020, when India had received ₹1,70,262 crore, or $23 billion. The state of the market would be highly impacted by whether such heavy FII funding continues in 2024 or not, which in turn will be guided by Fed's actions.

As for the market's apprehensions linked to the next general elections, the world of business is not divorced from that of politics. With the government being the major investor of capital expenditure in the country, the policies, agenda, mode of execution, and private partners of the government projects affect not just individual stocks but also the flow of investors' funds into the stock market as a whole.

Historically, Nifty50 returns have always been positive six months prior to, and six months after, the results of general elections in India. However, it has also been observed that leap years, in general, have been harbingers of volatility and downturns in the Indian stock market. Thus, even though 2023 has proven to be a great year for the Indian stock markets, 2024 calls for a more cautious approach in taking calls on the stock market.