Early in the year a fund manager, with over three decades in the Indian stock market, lamented the art of stock picking had no value in today’s market. Investors, he pointed out were making money in almost every stock. The tenets of investing for the long term and not timing the market, he felt, were useless in such markets. While he may feel somewhat vindicated by the correction in stock prices, the fact is valuations remain rich.
While 2024 has seen one of the biggest bull runs, over the past couple of months, the bears have had the upper hand. The Sensex’s smart 16% return in the first nine months led investors to hope for another blockbuster year like 2023 – when the returns were 18.7%. The last three months, have however, forced them to significantly pare down their expectations.
So far in 2024, the benchmark Sensex has managed an 8.3% return —that’s less half the gains seen in 2023 and about 100-150 bps more than the rate on a one-year fixed. Although the broader market, the mid-cap and small-cap indices, continue to return over 20%, even this can be considered muted compared to over 45% in 2023.
The turn in the markets was partly the result of foreign portfolio investors (FPIs) looking for greener pastures in China. The Chinese government’s moves to reboot the economy with rate cuts and fiscal stimulus, it was believed, could drive up the markets. Moreover, valuations were far more attractive than in India where the markets were expensive.
India Inc’s disappointing second quarter performance compelled the street to focus on earnings against the backdrop of already-high valuations. The Q2FY25 GDP growth of 5.4% year-on-year, a seven-quarter low made it clear the economy was slowing. While some of this was attributed to the elections and inclement weather, incoming high frequency data for the December quarter, made it evident that consumption demand was weak.
In addition, the return of Donald Trump as president of the United States, analysts, said could mean challenges for emerging markets; for India the possibility of higher import tariffs in the US, could be a big headwind, they cautioned. Andrew Holland, CEO at Avendus Alternate Strategies says he doesn’t see everyone rushing to India, even on a relative basis, because of the currency depreciation which we have been seeing.
Not surprisingly, FPIs have pulled out over $10 billion from the equity markets. The local institutions have, in contrast, invested about Rs 1.73 lakh crore or $20 billion on the back of continuing flows into mutual fund schemes. Monthly inflows into systematic investment plans (SIP) are now averaging Rs 25-30,000 crore; small investors have been undeterred by the correction in stock prices and have continued to invest large sums in both October and November.
That trend could spill over to 2025 but Holland is walking into the new year cautiously. “My view is to just sit on some cash, waiting to see how things may be looking to play out. This might be a good strategy just in the short term,” he says. While interest rate cuts at home could cheer the sentiment, the RBI’s rate cutting cycle is expected to be a shallow one.
The US Fed has already indicated it would make just two cuts in 2025 – than the anticipated four. Puneet Maheshwari, director, Upstox believes the markets have entered a consolidation phase with the slower GDP growth and weakening urban demand. If this continues, he expects fewer firms to even tap the primary market, which had continued to see interest from FPIs even while they were sellers in the secondary market.
Ambareesh Baliga, an independent market analyst expects 2025 to be a difficult year to make quick money and that the retail investors, might prefer to go back to capital protection options if they face sustained losses. “The last 4-5 years has seen investors make easy money which explains the record number of new investors,” he says. Holland expects returns between 5-10% in 2025, in-line with lower estimates for corporate earnings growth, down from initial forecasts of 15%. He expects more earnings downgrades in the Q3 earnings season.
Sujan Hajra, ED and chief economist at Anand Rathi group, believes investors should moderate their expectations for 2025, particularly in the mid and small-cap segments, where valuations appear stretched. Hajra prefers large-caps over small-caps for a one-year horizon, with small-caps holding a slight edge over mid-caps.