1. What do you make of the stock market correction over the past six months? Please share your views on the impact of massive FII selling and the weakening rupee?
India’s 20% decline in stock market over the past six months can be attributed to, (1) Economic slowdown, (2) Selling by FIIs and Promoter due to rich valuations, and (3) increased threat of trade war by new political dispensation in USA.
India’s economic slowdown to around 6% GDP growth in the current fiscal from around 8% growth during the previous year, led to disappointing earnings growth of just 7-8% in the BSE-500 stock universe. Host of factors ranging from tight money policy of RBI, sharp rupee depreciation, lesser government spending, and adverse weather impacted consumption demand and ergo, India’s growth.
Decline in India’s growth premium along with premium valuations relative to most global markets, and weakening rupee pushed FII to substantial selling of their holdings. Company promoters too used the rich valuation to sell stakes heavily. Heavy selling by both, FII and promoters amidst weak earnings eventually caused our stock market correction.
2. Where are we headed in 2025 in terms of corporate earnings and economic growth?
Economy is witnessing gradual recovery and could gather pace in the second half of fiscal 2025. Improved government spending since Dec 2024, along with stronger growth in agriculture sector is likely to help the first half of 2025. Cut in income tax, and lowering of interest rates announced recently will likely boost economy with a 4–5month lag, thereby aid reversion of GDP growth to around 7% starting second half of fiscal 2025.
India’s GDP growth had declined to 5.4% in the July-Sep2024 quarter, owing to a combination of poor consumer demand, excessive rainfall and drop in government spending owing. GDP growth is likely to have recovered to 6.2% in Oct-Dec 2024, and may further accelerate to 6.5% in Jan-Mar2025.
Corporate earnings growth has bottomed out too, and most analysts expect earnings growth to bounce back to 14% in fiscal 2025 compared to 6-7% in fiscal 2024 owing to economic recovery. Earnings recovery will be led by consumption, while exports face headwinds of possible trade war.
3. What are the top three sectoral themes that look attractive for investing at present?
Key themes this year likely to be consumption recovery and rupee depreciation. Top three themes according are as following.
Consumer Discretionary: Reduction in income tax for salaried class earnings up to Rs12lakh per annum will leave additional Rs 1lakh crore in the hands of consumer in FY25. Reduction in interest likely to the tune 0.5% will boost consumption further. We expect stronger growth in consumer discretionary items like hotels, aviation, garments, Acs etc.
Financials: Large private banks and NBFC are available at reasonable valuations and will likely see stronger credit growth owing to easier monetary policy regime.
Information Technology: India’s IT sector is unlikely to be impacted by reciprocal tariffs proposed by USA. IT sector will also benefit from likely rise in adoption of AI technology. Weaker rupee should help sector margins. Valuation of sector is reasonable too, and hence stands to do well.
4. What are your expectations for the equity markets in 2025 across various indices?
We expect India’s stock markets to deliver around 12% return over the next 1 year, driven mainly by earnings growth, as current valuations are still not cheap and NIFTY PE at 19xFY26e is at 10 year average.
While small and midcap delivered far better returns in last 2 years, year 2025 looks favorable for large caps. Bulk of small and midcap are in manufacturing sector which will be affected by slower govt infra spend, and escalation of trade war by USA. Large caps are dominated by financials, IT and consumer companies, which could perform better in 2025.
Also valuation of large caps seems more attractive than small and midcaps in general.
5. How do you plan to navigate tariff uncertainty as it unfolds? Do you believe we are heading toward an era of deglobalization, which, if it happens, could be detrimental to the equity asset class?
Proposed tariff hike by USA under the Trump administration could hurt India’s manufacturing sector, led by automobile and pharma. While actual impact on earnings won’t be meaningful given India cost advantages, impact of valuation de-rating is possible. We plan to side step such headwinds, avoiding companies which could face direct competition from US companies. We will watch for companies which will help facilitate entry of US companies into India. US cos already present in India could do better too.
However, proposed tariff policy of USA is not deglobalisation, as tariffs are being aimed at reducing the differential across countries. Also, tariffs will be used to reduce the global trade imbalance. The transition to balance trade could be painful. Good thing is that Trump administration is keen on ending USA support to wars in general including the ongoing Ukraine-Russia and Israel-Palestine conflict. Consequently, the benefit of global peace should aid in bringing down cost of logistics and defence, and should outweigh the negatives of trade wars. And this will eventually be good for equities as an asset class.
