The consolidation phase, which started on 27 September 2024, has now entered its fifth month. During this period, the Nifty 500 index has corrected 15.5 percent from its September peak to the trough on 28 January 2025. We consider this correction to be reasonable, addressing key challenges in the equity market, such as sluggish earnings growth and uncertainties surrounding international trade and economic policies.
Looking ahead, we anticipate the downside risk to be limited to a range of 3 to 5 percent, creating an opportune environment to adopt an accumulation strategy and enhance equity exposure. The consolidation period may extend for a couple of additional months, contingent on India is in the final phase of consolidation developments related to Trumponomics, USD appreciation, and a recovery in earnings growth. The market is currently underestimating the potential upside that could arise from a reversal in USD appreciation, which is likely to materialize once U.S. yields peak. Domestic earnings are anticipated to show improvement starting from Q4, which could stabilize India’s valuation downturn. If earnings growth reaches ~15 percent in FY26, the performance of the domestic market is likely to improve. The 2025 budget is set to revive government spending, which took a backseat in 2024, providing an additional boost to the domestic economy. With the global economy expected to perform well in 2025, India’s economic growth is projected to rise from 6.4 percent in FY25 to 7 percent in FY26. Over the longer term, the domestic economy is expected to maintain a healthy growth trajectory of 6 percent to 8 percent, reinforcing the case for a “buy on dips” strategy. In this context, further reductions in equity exposure are not recommended. Instead, a patient and measured approach to equity investments is advised.
The upside of Q3 result, budget, and Trumponomics
The ongoing Q3 corporate results largely align with expectations and show improvement over the disappointing Q2 performance, reflecting QoQ growth. Earnings growth is forecast to be at ~10 percent compared to the 5 percent of Q2. Narrative and economic data suggest that Q4 will be better than Q3. If India’s earnings growth trajectory moves towards 15 percent for FY26, which is the long-term trend, valuations, which have contracted below the 5-year average of 19.5x, can improve.
The market is yet to fully account for the potential upsides stemming from the 2025-26 budget. Expectations from this budget have been relatively muted, but the government is likely to focus on advancing its long-term agenda to drive real GDP growth toward 8 percent. This strategy is expected to involve increased public expenditure and measures to stimulate both consumer demand and corporate investment, further strengthening the economic outlook.
Current market concerns are centered around uncertainties surrounding the potential economic policies of President Trump and the hawkish stance of central banks. Fears of persistent inflation and higher tariffs are driving market panic. The FED’s Quantitative Tightening (QT) is leading to the reversal of funds; US dollars invested in equity worldwide are moving back to the creator.
However, the uncertainty surrounding Trump’s policies may stabilize the Indian market if they are not perceived as anti-India. During Trump’s first term, tariff increases were significantly lower than initially feared. Moreover, Trump’s intent to engage with China and India before finalizing tariff decisions helps temper concerns. The proposed 25 percent tariff on Canada and Mexico is unlikely to affect India.
Sectors to lean on in 2025
The year 2025 will have to face multiple challenges, including elevated valuations, reduced liquidity, and slower earnings growth. However, the stock market continues to offer viable investment opportunities, underpinned by the robust performance of the economy. Both the world and domestic economies are expected to do well in 2025 with no signs of recessionary risk in the medium-term. As a result, despite the short-term cautious view, drastically reducing equity exposure is not recommended, as it could lead to long-term underperformance.
The crux will be to hold a deep presence in equity with focus on high-quality stocks and sectors. The vital decision will be to hold or realign it towards sectors poised to navigate and overcome the challenges of 2025 effectively. Additionally, diversifying into quasi-assets such as REITs, INVITs, corporate bonds, and ETFs (sector wise & cross country) can be a prudent approach, offering periodic income and preserving capital.
In 2025, capital preservation will be a key investment focus. Within equities, the safety of a stock is rooted in its intrinsic value. Value stocks – characterized by low valuations and beta relative to their historical averages and the broader market – are particularly attractive. High[1]dividend-yielding stocks stand out in such an environment, offering steady income alongside capital stability. Companies with strong cash flows from operations (CFO), monopolistic qualities, and industry leadership are highly valued stocks. Like the top 3 stocks of a stable industry or companies holding supremacy in a niche segment, they are generally justified as high quality. Value stocks and high-dividend payers are expected to be the dominant theme of 2025.
These three sectors: Private Bank, IT and Pharma have a decent outlook for 2025.
Private banks are led by clean balance sheets. The industry is expected to be muted, led by a drop in liquidity and a rise in NPAs from microfinance and MSMEs affecting PSBs, NBFCs, and small banks. However, the large private banks are expected to continue to benefit from the high economic growth and low valuations.
The IT and Pharma sectors are supported by a stable business outlook from the US and the continued strength of the dollar, both of which are expected to persist. These sectors also serve as a defensive play amid short-term stock market uncertainties. A concern is that the valuation of these sector are on the higher side, limiting upside. And for pharma, the outlook for generics players is dull due to the risk of price erosion, suggesting a stock pick approach.
Sectors like chemicals and defence have been very weak particularly in the later phase of 2024. However, there is a growing consensus that their valuations are becoming attractive for long-term investors. These sectors hold a positive outlook, supported by strong volume growth and robust order book positions. That said, the potential risk for market disruptions from China drubbing continues to weigh on sectors’ performance.
Similarly, renewables, and electronics manufacturing services are positioned for substantial growth, driven by business scalability and expanding market opportunities. However, their supreme valuations make them a riskier proposition in the short to medium term.
In recent years, the consumer sector faced headwinds, including adverse weather, rising food inflation, and shrinking disposable incomes. Additionally, pent-up demand waned, while urban demand suffered due to slower wage growth, election-related restrictions on government expenditure, and disruptions caused by the shift to quick commerce from traditional channels. The effect is expected to continue in Q3 and Q4 FY25.
Meanwhile, FMCG is poised to benefit from favourable climatic conditions, robust rural and urban demand, and fair valuations, particularly with large-cap stocks trading below historical averages. Record-high kharif crop production and favourable post-monsoon conditions for the rabi season are expected to drive rural demand and ease food inflation. In addition, urban demand is likely to recover with increased government capital expenditure in the second half of FY25. As a result, FMCG presents a compelling long-term investment opportunity.
Other sectors such as infrastructure and cement, show strong growth potential, supported by stable project financing positions, reasonable valuations, and increased government spending. The textiles sector emerges as a potential dark horse, poised to benefit from increased geopolitical uncertainties in Bangladesh, declining input costs, and the adoption of the China Plus strategy by global supply chains. Trends indicate a rise in inquiries for new export orders. Generally, the mid cap stocks in India are trading at a 60 percent premium to large caps, which is at a historical peak range, suggesting that large caps are a better bet.
