As 2024 draws to a close, the market has turned weak. October and November witnessed relentless FII selling which pulled the Nifty down by around 10 percent from the peak. December began with a shift in FII strategy from selling to buying. But buying in early December gave way to resumption of selling by mid December. The year 2024 is likely to end with mid double digit returns in Nifty.
The star performer of 2024 is, by far, the US. As on 20th December the S&P 500 has delivered 25 percent returns YTD and Nasdaq has sparkled with 32.5 percent returns YTD. Nifty relatively underperformed with 14.6 percent returns YTD as on 20th December. The resilience of the US economy surprised everyone including leading economists and the Fed. The US economy which was expected to clock a GDP growth rate of two percent in 2024 is likely to end with a growth rate of 2.7 percent. Corporate profitability in the US is robust and is expected to get a further boost when President Trump implements the promised corporate tax cut. The ‘Trump trade’ has been attracting huge capital flows to the US pushing the dollar index above 108.
The Fed commentary on 18th December spooked markets. Even though the 25 bp cut in interest rate was on expected lines, the Fed chief’s comment that “caution is needed when cutting rates further” was interpreted by the markets as hawkish commentary. Markets now expect only two rate cuts in 2025 against the earlier expectation of three to four rate cuts. The US 10-year bond yield spiked to 4.52 percent. The combination of rising bond yields and appreciating dollar triggered renewed FII selling, pulling the market down.
The real concern in the market now is the slowdown in GDP growth and corporate earnings in Q2 FY25. The question is: is this slowdown a one off or cyclical? If it is cyclical, lasting a few quarters, it will be challenging for the market. But it is highly probable that it is a one-off caused by low government spending in Q2 constrained by election-related restrictions. The government capex has picked up since August and this is likely to be reflected in Q3 and Q4 GDP prints. However, the earnings recovery is likely to be muted.
Sustaining the bull run in the market needs either earnings growth or PE expansion. Valuations continue to remain higher than the long-term average. Nifty at 24,000 is trading at around 20 times estimated FY26 earnings, against the long-term (10 to 12 years) average of 18 times. This leaves no room for PE expansion. Therefore, recovery in growth and earnings recovery are crucial.
In 2025 the market will be influenced by a ‘known unknown’. Mr. Trump is unconventional and mercurial; that is known. What President Trump will do in his second term is the unknown factor. We will have to wait and see how things unfold.
In early 2025, the market will be keenly looking forward to the Budget and the monetary policy under the leadership of the new RBI Governor. The economy needs both fiscal and monetary stimulus. The macro backdrop is appropriate for stimulus measures. Investors should look beyond the New Year and focus on systematic investment and building good portfolios with long-term vision.
