Markets gain over 8% in 2024; analysts expect 12-13% growth in 2025

On December 31, the BSE Sensex closed at 78,139.01, down 109 points, while the NSE Nifty settled at 23,644.80, down 0.10 points. The Sensex had hit a high of 85,978.25 on September 27, but declined in the subsequent weeks due to slow economic growth and foreign portfolio outflows.

Markets are preparing to move into the new year with caution since uncertainty is high and valuations are stretched. The year 2024 witnessed a sharp slowdown in foreign portfolio investor (FPI) activity, with foreign investors pumping in just over Rs 1,600 crore on a net basis into the domestic equity market compared to a robust inflow of Rs 1.71 lakh crore in the previous year.

Concerns over valuation

The significant shift in foreign flows in 2024 can largely be attributed to concerns over the valuation of Indian stocks, below-than-expected domestic GDP growth in the second quarter of fiscal year 2025, weak corporate earnings, and higher US bond yields.

“Given our constructive view on India’s domestic macroeconomics and hopefully improving relations with the West, Indian equities can deliver about 12-13 per cent growth this year. We expect that corporate earnings will still remain susceptible to some downgrades and anticipate them to be in the low double digits versus the mid-to-high teens expected by the market,” said Jitendra Gohil, chief investment strategist, Kotak Alternate Asset Managers.

These downgrades could be largely driven by margin contraction and partly offset by revenue acceleration, Gohil said. “From a valuation perspective, we do not expect major de-rating in the headline Nifty Index, with the 12-month forward PE expected to remain in the 19 to 21 times range,” he said.

India’s structural growth in the tax-to-GDP ratio and the government’s discipline in maintaining fiscal prudence will boost India’s fixed income with a buy-on-dips strategy.

The rupee appreciated against most of the other major currencies in 2024. “We expect the rupee to depreciate against the dollar but at a much lower level compared to the historical standard of about 4 per cent per annum. We maintain our positive stance on gold with a 5 to 7 per cent portfolio allocation, while within international equities, the US remains our preferred market. Chinese equities may see some bounce after years of underperformance, but structurally, we still remain concerned about the economic headwinds China is facing in the near-to-medium term,” Gohil said.

What lies ahead?

Analysts said the high US bond yield and strong dollar will ensure that FPIs will continue to sell on every rise. Domestic institutional buying will not be strong enough to take the market much higher. The fact is that even the DIIs and HNIs don’t have the conviction to accumulate stocks, except in certain pockets of fair value. “Conviction to accumulate stocks will emerge only when macro indicators suggest recovery in growth and earnings. Watch out for the Q3 results starting from January 10th to identify companies reporting good numbers despite the growth slowdown,” said an analyst.

Navneet Munot, managing director and chief executive officer, HDFC AMC Ltd, said: “I think the world stands at the cusp of an investment cycle — out of compulsion.

According to Vinod Nair, head of research, Geojit Financial Services, the pressure of consolidation is dragging the domestic momentum amid negative global cues and ongoing concerns over a strengthening dollar index and US bond yields. “FPI outflows and rising crude prices are pressuring the rupee and dampening sentiment. Nonetheless, the market’s focus is expected to shift back to domestic Q3 results for insights into potential growth and earnings recovery and to the Union budget, offering a short- to medium-term perspective amid global uncertainties,” Nair said.