The year ended on a positive note, with the Indian markets remaining resilient and ending on a positive note. 2024 remained a marquee year, with multiple events that marked the year including delayed rate cuts owing to the US elections. While the ‘December effect’ could have had a role to play, the markets failed to make good all the losses that it made over the past year. We witnessed a slowdown in the Indian economy with the GDP growth failing to meet projections. Indian wages too seemed to contract as corporate profits slumped and consumer spending was cut sharply. Small and Mid-cap continued to outperform, with returns remaining favorable since 2024. Most Indices delivered double digit returns, especially within the Mid and small cap space despite continued concerns around valuations.
As we enter the new year, we expect:
Valuations to average, with return expectations being aligned with growth:
We’ve also witnessed an increased FII outflow from the country leading to a decline in equities. However, domestic investments continued to buoy the markets. Small Cap funds attracted the largest inflows up until December 2023. However, we’ve witnessed a reversal in this trend with Sector/thematic funds taking the lead. The Jan-Mar 2024 AMFI data reflects inflows to the tune of INR 23,985.12 crores into the Sector/thematic category, as opposed to that of INR 6,085.27 crores into the small cap category. The trend continued into the July-September 2024 quarter, with Sector/Thematic funds garnering inflows to the tune of INR 49,758.16 Crores, as opposed to INR 8,389.37 Crores into the small cap category.
Mid and Small caps are largely viewed as expensive, but have also shown superior growth, as compared to large caps. We expect to see a correction in this space owing to the current market movements and investor expectations.
Large Cap valuations to remain favorable:
Large Cap Valuations continue to remain favorable on a relative basis with an uptick in earnings. We expect some consolidation at a sector level too.
FMCG, Metals & Mining, PSU Banking and Energy continue to remain inexpensive compared to pre-covid valuations while sectors like Real estate, Pharma, Autos and Cap Goods are highly valued. We are likely to witness a consolidation in these sectors in the absence of new earnings growth drivers. Silver has been witnessing an uptick and works as a good hedge.
New drivers of alpha:
The country could offer alpha opportunity to managers as new spaces that offer strong compounding stories emerge. In the past, several ‘new’ sectors like Electric vehicles, new tech, luxury consumption, defense etc. have witnessed strong growth. We expect sectors like AI and Nuclear energy to witness growth and expansion, thus providing opportunities. A strong sector focus is likely to drive opportunities to generate alpha going forward.
At a macro level, RBI could cut rates as our forex reserves continue to improve. However, we expect the easing to remain slow owing to the relatively high magnitude of food inflation. Policies that promote growth are likely to continue, even as we are likely to see a cut in the investment spending by the government as it strives to contain the fiscal deficit further in line with the roadmap that it has set for itself. This could mean that the baton of capex spending will pass on to the private sector and private sector capex will be closely watched. A major portion (about 60%) of India’ s GDP is driven by household consumption which it needs to maintain in order to continue to instill confidence for domestic investments and attract foreign inflows.
Globally, there is a larger sentiment to disengage with China. We also saw India surpass China to become the largest market in the MSCI Emerging Market Index. Now, with China trying to revive its economy and demand, there could be some reallocation of flows into China, especially considering that relative valuations tip in China’s favor. However, financialization of savings in India is a positive. Domestic investments in the markets continue to drive the economy, while there is a marked shift from the markets to real estate and gold in China.
Trump’s protectionist measures could be seen as inflationary and could delay the quantum of cuts that the US is expected to witness. At 4.5%, US bond yields are already likely pricing in the impact of these. In India, a lower interest rate environment could result in a positive impetus to the market. Lower regulated rates do seem like a probable scenario for over the second half of 2025. Overall, we think that the market will continue to grow, albeit at a slightly slower pace with marked corrections in some sectors and significant growth in others.
