Caution Ahead

Every January equity investors tend to tread cautiously, not the least because of the historical trend of negative returns in the first month of the year. Over 20 years, the benchmark NSE Nifty 50 index has declined on 13 occasions during this month.

Perhaps they will be even more circumspect this year considering the series of major events that are set to shape the trajectory of the markets over the next few months. First, there’s the swearing-in ceremony of Donald Trump as the US President on January 20, an event that is expected to mark the beginning of a significant shift in global market sentiment. It will be followed by a possible delay in aggressive rate cuts by the US Federal Reserve and the Union Budget on February 1.

Market watchers believe investors could be jittery. G. Chokkalingam, Founder of Equinomics Research, an equities research firm, says, "We expect the first two quarters of 2025 to remain subdued for the Indian equity market. A weaker rupee, a possible delay in rate cuts by the US Fed, and the forthcoming Budget would delay the return of foreign institutional investors (FIIs) to Indian equities."

Overall, despite FIIs selling shares worth Rs. 1.15 lakh crore in October and November, they bought equities worth Rs. 3,460 crore in 2024 till December 27. In comparison, their net investment stood at Rs. 1.71 lakh crore in 2023. Meanwhile, the rupee declined 3% YTD to an all-time low of nearly 85.82 against the dollar on December 27.

Jathin Kaithvalappil, Assistant Vice President at Choice Broking, believes that the Indian equity markets could be cautious in the January-March period. “Creeping inflation in different parts of the country will certainly be one of the issues. There may be emerging opportunities, but overall it is likely to be flat, balancing the positive with several global uncertainties.”

Kaithvalappil thinks FIIs will return gradually in 2025, influenced by stabilising global interest rates and India’s strong growth potential. The pace of return will depend on geopolitical stability, currency dynamics, and risk appetite, he says.

Other analysts are cautious for the whole of 2025. Ruchit Mehta, Head of Research at SBI Mutual Fund, says 2025 could be a volatile one for the domestic equity markets, continuing the trend of the last few months of 2024.

“For markets to deliver double-digit returns, earnings growth has to sharply rebound from the current sluggish levels to the high teens range. This is not a given and would need revenue or sales momentum to recover and be the primary driver of earnings growth,” Mehta says.

The other factor that will influence market movement is the strength of corporate earnings. There’s some trepidation there, too, since there were signs of weakness in the September quarter results. The combined profit after tax (PAT) and sales of Nifty 50 companies witnessed a growth of just 4% each in Q2FY25. “It is possible that in the second half of 2025 we could see revenue growth momentum recovering, as economic growth pulls through from the current slow phase,” says Mehta.

In terms of returns in 2024, the 50-share Nifty index gained nearly 9% on a year-to-date basis till December 30. On the other hand, the broader indices, including the Nifty Midcap 100 and Nifty Smallcap 250 gained 24% and 26%.

Achin Goel, Vice President of Bonanza Portfolio, says, “The outlook for the Indian stock market in 2025 appears cautiously optimistic, influenced by a blend of domestic events and global economic dynamics.”

He explains that the New Year is expected to be filled with uncertainty because of a combination of factors. “If Trump pushes ahead with increasing tariffs by 10-20% on all US imports, rising to 60% for Chinese goods, the resultant impact will depend on what sectors will get affected and how stakeholders respond,” Goel says, adding that for many other economies, the possibility of a stronger dollar is worrying.

Asked if the broader market will continue to deliver and which sectors may show some momentum going ahead, Mehta of SBI Mutual Funds says equities will remain the best means to compound capital over the long term. “What occurs in the shorter term, as in just one calendar year, is uncertain and difficult to forecast. From a pure valuation and sentiment perspective, there appears to be much more froth in the broader markets, which can act as a headwind going forward,” Mehta says. He adds that companies exposed to the infrastructure and capex upcycle will benefit considering the current business environment.

He also sees potential for the consumer discretionary sectors such as tourism. Mehta also believes that the financial sector is likely to do well amid hopes that credit growth will pick up in the coming quarters on the back of improving economic growth and easier monetary conditions.
 

@iamrahuloberoi