The year 2024 concluded on a positive note, despite experiencing high volatility in the fourth quarter. The market began strongly, driven by robust FY24 corporate results. Initially, we projected the Nifty50 to reach 23,600 broadly expecting a return of 10%. Subsequently, we revised our target twice: first to 24,250 and then to 24,600, following an upgrade in the FY24 EPS base and a re-rating of India’s valuation post-national election. The Nifty50 peaked at 26,277 in September and closed at 23,753 on 23rd December, up 9.3%.
For 2024, we recommended a multi-asset approach of equity, debt, and gold due to reduced risk, high interest income, and in anticipation of upside in the domestic economy. Within equities, we favoured large caps over mid and small caps. However, mid and small caps outperformed large caps due to strong domestic inflows, although their performance moderated in the second half of CY24.
We recommend continuing with the multi-asset strategy. Our base target for the Nifty50 is 26,250, projecting a 10-12% return. We value the market at a 5-year average P/E of 19.5x on a one-year forward basis. However, we understand that there is a risk of further moderation in India’s valuation unless earnings growth rebounds in CY25.
Overall, the environment appears favourable for equities due to the easing of hyperinflation and interest rates expected in 2025. Consensus has improved for both the global and domestic economies, with reduced geopolitical and recession risks in the medium-term. Nonetheless, uncertainty surrounding a potential trade war poses concerns for early 2025, though it is presumed to be less challenging than during the Trump administration of 2017- 2021. Additionally, India’s high valuation may limit upside potential in the short to medium term; hence, we currently expect a normal positive return in 2025.
The story of CY24
On a consecutive year, mid and small caps have outperformed the broad market, led by strong DII and retail inflows. Comparatively large caps did well in H2 with a reduction in underperformance. During the period, FIIs inflows increased in large caps, which were muted during pre-election period and the slowdown of the world economy. The positive outcome of the national election led to a strong revamp, re-rating the country valuation above the long-term average. India was amongst the best performers during the post-election period of 3 months.
However, the performance weakened by the end of September due to a combination effect of the ‘unwinding of the Yen Carry Trade’ as interest rates started to climb in Japan, affecting cross-country short-term investment. FIIs selling increased due to India’s premium valuation compared to the other EMs. Additionally, corporate performance weakened post Q4FY24 results. National elections and eight state elections during the year significantly slowed government spending, reducing GDP growth from 8.6% in Q3FY24 to 5.4% in Q2FY25. Corporate earnings growth also slowed from 24% in FY24 to 6% in H1FY25.
Overall, the year ended on a positive note with the broad market providing a return of 15%, after decent returns in CY2023. In December, FIIs selling reversed but lost the trend due to a change in FED policy to neutral, reducing the plausibility of a high degree of rate cut in 2025, which was in contrast to September policy.
Outlook for 2025
• We expect CY25 to be positive with a base target of 26,250 for Nifty50 with a peak and trough range of 27,650 and 21,600 respectively. We expect a positive return of 10-15%.
• The Indian economy is forecast to strengthen in FY26, where real GDP growth is forecast to recover to 7.0% from the moderation of 6.5% in FY25, indicating that the domestic market in CY2025 would be stable, enhancing the chance of a positive outcome.
• Globally, the positive is that war risk in Russia-Ukraine and Israel-Palestine is likely to moderate. Inflation and interest rates are reducing, which is positive for equities.
• At the same time, the global risky point is uncertainty regarding a potential trade war. However, it is presumed to be less hostile than during Trump’s first term. It is also understood that it will be less fragile for India compared to the Rest of the World, giving us an edge.
• A key hurdle for India is premium valuation; it is trading at the higher side of a one year forward P/E of 20x, which will affect the performance of the domestic stock market in the short to medium-term.
• India’s EPS growth is likely to be moderate at sub 10% in FY25 and 12-15% in FY26, which may not support the high valuation of the last 4 years.
• On a positive note, domestic corporate earnings are forecasted to recover from Q3FY24 onwards. However, it remains uncertain whether this recovery will be strong enough to match the performance of the past 2-3 years.
• A positive aspect is that the Indian economy is projected to be one of the largest, with real GDP growth of 6-7% and nominal growth of 10-11% over the decade. This supports a premium valuation for the country in the long term.
• Therefore, sectors and stocks with high business scalability models are likely to command higher valuations.
Generally, the outcome for 2025 is encouraging for the world equity market. As no recession is being feared and both the world and domestic economy are forecast to be prosperous in 2025. Though the US is expected to moderate due to a reduction in fiscal expenditure, it is still at a decent growth rate of 2.0%.
India’s challenge lies in its high valuation, which it has enjoyed for the past 3-4 years. This premium may diminish in the short to medium term. To achieve returns above the broad market, we need to focus on specific stocks and sectors.
The sectors in India which are in focus are like Electronics Manufacturing, Solar Cell and Panel, Wind Energy, EV, Data Center, Chemicals, Textile and Real Estate. These areas are also providing optimism to allied sectors like communication and equipment manufacturers and infrastructure (including digital infrastructure) bringing additional growth. This is because of the government subsidy based PLI initiative and China plus strategy.
Given the high pace of demand and revenue growth, these sectors experience significant revenue growth and constant funding requirements. However, the limited availability of such stocks in the market makes their valuations high. As a result, long-term investor confidence becomes low; conversely, short-term interest remains high. These are the areas attracting an extra boost to the Indian economy and stock market.
