Capex or Consumption: Where Will the Leaders of the Next Bull Run Emerge?

Dear Investors,

January 2025 was a challenging month for Indian equities, with Sensex and Nifty 50 declining 0.6% and broader indices like Nifty Mid Cap 150 and Nifty Small Cap 250 falling 5.9% and 11.9%, respectively. Global economic and geopolitical concerns, coupled with a renewed rise in inflation, led to expectations of potential rate hikes. Additionally, continued weakness in corporate earnings, as seen in Q3 results so far, contributed to this pullback.

Market is going through consolidation and India’s investment landscape stands at a crucial turning point. Between FY20 and FY24, India’s capital expenditure (Capex) grew at an impressive 30% annually. However, after four years of rapid expansion, the trajectory of Capex is now showing signs of change. Despite the Capex-to-GDP ratio reaching an all-time high of 4.5%, its growth rate is expected to decelerate to around 8% in FY25. While even a single-digit growth rate is considered a positive indicator given the high base, it marks a pivotal shift in the stock market’s dynamics. As markets are inherently forward-looking, this change suggests that sectors heavily reliant on Capex— such as infrastructure, defence, railways, and power—may require more cautious attention moving forward, with a particular focus on valuation.

Investor flows into Indian equities have also been seeing a notable transformation. Prior to the Covid-19 pandemic, foreign institutional investors (FIIs) predominantly dominated the Indian market. However, this has shifted as domestic institutional investors (DIIs) have become the primary drivers of market activity. Over the past four years, FIIs have been consistently reducing their exposure to Indian equities, while DIIs have ramped up their investments. As of December 31, 2024, FIIs held their lowest allocation to Indian equities in six years, with their share relative to DIIs nearly halving. The FIIs-to-DIIs ratio dropped from 1.99 in March 2015 to just 1.02 by the end of 2024.

Capex-dependent sectors are often categorized as part of the “old economy,” while consumption oriented businesses are labelled as part of the “new economy.” Typically, the old economy requires massive capital expenditure and offers slower, less consistent earnings growth. In contrast, the new economy demands less capital and promises secular, high-growth prospects. FIIs have historically favoured the new economy, and as consumption-related were showing slow down, FIIs kept reducing their allocations to Indian equities however the peak of Capex growth seems to have passed, and as we move into FY26, the focus should shift to consumption. With consumption driven revival of economy, FIIs could also start looking back; currency arbitrage is in any case now in their favour. So, sectors and leaders will change but, investment lead wealth creation opportunity continues.

Dear Investors,

The GDP growth forecast for FY2025 has been revised down to 6.5%, reflecting a slowdown in economic momentum, particularly in domestic consumption and industrial growth. However, the outlook for India’s equity markets in 2025 remains cautiously optimistic, with expectations of a recovery in the second half of the fiscal year, driven by improved corporate profitability and stronger consumption patterns.

Performance : The Nifty index saw a 2% decline in December 2024, reflecting broader global trends where markets showed mixed performance. This dip reflects the continued volatility and risk-off sentiment in global markets, driven by ongoing concerns about inflation, interest rates, and geopolitical uncertainties.

Winners : The Healthcare (+3.7%), Realty (+3.4%), and Consumer Durables (+3.1%) sectors performed well, driven by defensive demand, potential growth in the real estate sector, and steady consumption trends in durable goods.

Laggers : The Power (-7%), Metals (-5.4%), and PSUs (-5.2%) sectors underperformed, likely due to global demand concerns, rising input costs, and weaker commodity prices affecting the metals sector. Additionally, public sector undertakings (PSUs) faced headwinds from potential regulatory challenges and slower growth in public spending.

FPI : They remained net buyers, investing $59 million in Indian equities, reflecting their cautious optimism about India’s medium-term economic prospects despite global uncertainties.

DII : They showed more confidence, with $4 billion invested, signalling that domestic investors are willing to take a long-term view despite the market’s near-term volatility.

Inflation : CPI inflation eased to 5.5% in November 2024, which is a positive sign for the economy, indicating that inflationary pressures may be moderating.

IIP : Industrial Production grew by 3.5% in October, showing some resilience in the manufacturing and industrial sectors, though growth is slowing compared to previous years.

Exports : It rose 7.6% during April-November 2024, reflecting strong demand in certain sectors, particularly technology, pharmaceuticals, and textiles.

Trade Deficit : It stood at $83 billion, highlighting the challenges posed by rising import costs, especially in oil and gold. A widening trade deficit may exert pressure on the Indian rupee in the coming months.

Currency : The USD/INR hit a record low of 85.6, signalling weakness in the rupee, partly due to a strong U.S. dollar and the ongoing trade deficit.

Bond Yields : 10-year bond yields ended the month at 6.78%, reflecting market expectations of stable interest rates from the RBI.

GST : This rose by 7.3% YoY to ₹1.77 lakh crore, indicating healthy tax revenue growth despite the global slowdown.

Oil : Brent crude oil prices remained stable at $74 per barrel, a favourable factor for India’s energy imports, although oil price volatility remains a risk.

1. Economic Growth Slow but Steady Recovery : Global GDP growth expected at 2.5%-3.0%, with emerging markets (e.g., India, Southeast Asia) growing much faster than developed economies (US, Eurozone). Inflation could remain higher than pre-pandemic levels, with interest rates staying elevated until mid-2025, after which central banks may ease.
2. Geopolitical Tensions Rising Risks : US-China relations could remain tense, with ongoing trade disputes and technological decoupling. The Russia-Ukraine war could continue, affecting energy prices and stability in Europe. Middle East tensions (Iran, Saudi Arabia, Israel) might keep oil prices volatile.
3. Technology : AI and machine learning would disrupt industries like healthcare, finance, and manufacturing. Quantum computing may make progress in cryptography and problem-solving. Widespread adoption of 5G would fuel IoT, autonomous vehicles, and smart cities.
4. Social Shifts Aging Populations and Workforce Changes : Aging populations in developed nations will lead to labour shortages, potentially addressed through immigration and automation. Remote work and AI-driven automation will redefine workplaces, requiring reskilling efforts.
5. Healthcare : Innovation and Global Health Continued progress in personalized medicine and AI in healthcare for better diagnostics and treatments. Focus on mental health, global health equity, and pandemic preparedness.

In short, in year 2025, the world is expected to navigate a slow recovery, geopolitical tensions, and technological disruptions.

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