More Stories

Informist, Thursday, Jan. 2, 2025

 

By Anshul Choudhary
 

MUMBAI - High stock valuations are likely to affect returns in 2025, with analysts expecting the Nifty 50 to rise 10-12%, a sharp moderation from the 21% rise the index had chalked up last year at its peak, only to give up more than half of the gain in the last quarter of the year. Investors should brace for some volatility early in the year when Donald Trump is sworn in as the next US president and around the Union Budget, analysts said.

 

On the conservative side, Emkay Global Financial Services expects the Nifty 50 to return only 6% in 2025 considering slowdown in capital expenditure by the government and weak consumption demand. At the bullish end of the spectrum, ICICI Direct Research expects the Nifty 50 to return 20% this year, driven by capital expenditure from the government and private players, and the possibility of lower interest rates.

 

Though the long-term outlook on India remains positive, analysts have expressed concerns about the near-term due to the current slowdown in earnings growth, high stock valuations, and outflows from foreign investors. These concerns affected returns as the benchmark Nifty 50 fell nearly 10?tween October and December, giving up half of the gains accumulated in 2024 to end with returns of just over 9%. This was a sharp fall after the 20% rise in the index in 2023.

 

After the strong gains in 2023, expectations for 2024 were muted at the beginning of the year, and analysts have iterated conservative expectations for 2025 as well. Analysts said investors should curtail expectations of returns as, in spite of the recent correction, valuations are not attractive across the board with exuberance still present in several mid-caps and small-caps.

 

"Price-to-book of Nifty (Nifty 50) as a ratio to its 20-year median is about 17% expensive, but that ratio is much higher for mid-caps and small-caps...," George Thomas, equity fund manager at Quantum Mutual Fund, said.

 

Mid-caps and small-caps continued their extraordinary run in 2024 with the Nifty Smallcap 250 index rising over 26% last year and the Nifty Midcap 150 gaining nearly 24%. These gains were an addition to the 48% rise in the small-cap index in 2023 and nearly 44% rise in the mid-cap index.

 

Looking at high valuations in the broader market, analysts said it will be difficult for investors to make returns this year. "2025 will be a market for stock-pickers and the old strategy of bottom-up approach should be the focus," Sunny Agrawal, head of fundamental research at SBICaps Securities, said.

 

"...it would not be surprising if the benchmark indices slip into a consolidation phase along with healthy correction in the broader market, which would wipe out the speculative froth in small-cap/micro-cap stocks built up in the past two years," Sharekhan said in its 2025 outlook report.

 

Analysts advise investors to go for large-caps due to better valuations compared to mid-caps and small-caps. Earlier this month, HDFC Securities advised investors to keep at least 60% of their portfolio in large-caps.

 

EARNINGS SLOWDOWN

Apart from high valuations, returns could be negatively affected if the slowdown in earnings growth persists. After the poor earnings growth in the September quarter, analysts now expect 7-8?rnings growth for the Nifty 50 in 2024-25 (Apr-Mar), down from over 13% at the start of the year.

 

A prolonged slowdown in earnings growth is being seen as the biggest risk for equities, which came to the forefront as India's GDP growth for the September quarter fell to a seven-quarter low of 5.4%. Some analysts are worried that the slowdown may last for a few more quarters as the government is likely to miss its capital expenditure target set in the budget for this financial year due to the slowdown in such expenses due to the General Election.

 

There is also a concern that the government may stick to its plan of reducing its fiscal deficit to 4.5% by the end of FY26, which may limit its ability to raise its capital expenditure. Further, consumption has been weak for the last few years and any growth from here is likely to be gradual and not sharp as wage growth has been poor. Considering these risks, IDBI Capital's head of research Pravin Bokade said the earnings growth of Nifty 50 companies in FY26 may be just 5-6%.

 

The government is expected to maintain its focus on capital expenditure looking at the slowdown in economic growth. Analysts expect a high single digit increase in capital expenditure in the budget for the next financial year. In the current financial year, the government had targeted to spend over INR 11 trillion in capital expenditure.

 

Apart from government capital expenditure, a good kharif season is expected to lead to better incomes for the rural population and has raised hopes of a further improvement in rural demand this year. Abhishek Jain, head of research at Arihant Capital Markets, said the earnings of Nifty 50 companies may rise 10-12% in FY26 driven by government's capital expenditure and better rural demand. In order to post higher earnings growth, the manufacturing sector would need to surprise, he said.

 

"One would see reasonable growth rates going forward...obviously there is a slowdown in the economy and it would be a gradual recovery," Thomas of Quantum MF said. "Through the years, earnings growth should revert to long-term nominal GDP kind of number."

 

Some brokerages are more optimistic. Kotak Securities and ICICI Direct Research predict earnings growth for Nifty 50 companies at 16% in FY26. ICICI Direct's outlook has factored in pick up in capital expenditure by private companies, along with that by the government.

 

"Historically, private capital expenditure has been higher as compared to government capital expenditure. However, in the last 6-7 fiscals, private capital expenditure lagged government capital expenditure declining to similar level in absolute terms. Given capacity utilization at 76-78% level, we expect revival in private capex," the brokerage said.

 

One is yet to see how earnings will play out, but considering higher spending by the government this year, there is optimism that the current slowdown in earnings is temporary. "The outlook for Indian equities in 2025 hinges on whether domestic demand recovers from a cyclical slowdown, translating into robust earnings growth," Standard Chartered said in its 2025 outlook. For now, analysts largely believe the economy will come out of the slump as consensus shows that Nifty 50's earnings may grow nearly 13% in FY26.

 

FOREIGN FLOWS

Indian companies may face challenges if Trump imposes tariffs against India, which the brokerages have not factored in yet. This could hurt growth of export-focussed sectors such as information technology and pharmaceuticals.

 

While analysts downplayed the risk of extremely high tariffs against India, they said tariffs against China were a concern, which could further delay the recovery in China's economy. On the flip side, tariffs against China may benefit India as global companies are looking to diversify their manufacturing units, with India being one of the frontrunners.

 

Trump's policies, including his intention to cut corporate taxes, are seen as inflationary. If that happens, it would prolong the fight against inflation in the US, analysts said. The US Federal Reserve has cut interest rates by 100 basis points since its September meeting but the possibility of sharp rate cuts this year has already taken a hit. The dot-plot of expectations now shows rates are likely to be lower by only 50 bps in 2025, down from the earlier expectations of 100 bps of cuts.

 

This has raised concerns that Trump's policies could push inflation higher and lead to rates being higher for longer in the US. It could push US bond yields up or limit a fall from current levels. This will be a problem for the Indian market as high interest rates in developed markets make investing in emerging markets such as India less attractive to foreign investors.

 

This has already affected returns from the domestic market and foreign investors have sold Indian equities recently to invest in the US, where the 10-year bond yield has crossed 4.5%. Since the beginning of October, when markets started falling in India, the yield on the 10-year bond in the US has increased nearly 80 bps and was at 4.58% Tuesday.

 

Foreign portfolio investors sold Indian equities worth over $13 billion in October and November to largely invest in US markets, which meant the net investments of FPIs last year was just over $100 million, sharply down from $20.74 billion in 2023, according to data by National Securities Depository Ltd. A similar scenario could play out in 2025 as well, if bond yields in the US remain high, analysts cautioned.

 

While flows from foreign investors were weak this year, flows from domestic investors helped the market stay afloat and absorb the sales by foreign investors. However, several fund managers said flows from retail investors might be at risk in 2025 if markets don't perform for an extended period as retail investors tend to make decisions based on past performance. "Highest number of flows (retail) come at the (market's) top," a fund manager at a domestic mutual fund house said by way of abundant caution.

 

The 12-month targets for the Nifty 50 given by market participants are:

 

Brokerages	Base case target
Emkay Global Financial Services	25000
Geojit Financial Services	26300
Goldman Sachs	27000
HDFC Securities	26482
ICICI Direct Research	28300
Jefferies	26600
Kotak Securities	26100

 

End

 

Edited by Ashish Shirke

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000

 

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.