'2025 may see higher volatility': Vaibhav Sanghavi talks about market outlook

After rallying 19% in 2023, the benchmark equity index BSE Sensex has gained another 9% in 2024. Meanwhile, the BSE Midcap and BSE Smallcap indices, which surged over 45% each last year, have continued their robust performance with gains of 26% and 28%, respectively, this year. To put these numbers in perspective, the broader market has consistently outpaced the large caps, indicating a robust appetite for higher growth opportunities among investors. So, what lies ahead for the markets in the New Year 2025, and which themes could deliver solid returns to investors? In an interaction with Business Today, Vaibhav Sanghavi, CEO of ASK Hedge Solutions, shared his insights. Edited excerpts:

Q. What is your outlook for the domestic equity markets for 2025?

Sanghavi: Performance of equity markets in the longer term largely follows the performance in earnings growth. And within those intermediate time periods, they trade cheaper or expensive, depending on various shorter-term variables, narratives, and immediate visibility on growth.

As we enter 2025, we are starting with being expensive in terms of valuations relative to longer-term multiples, wherein we have borrowed some amount of future returns by more than adequate discounting. Thus, merely on those fronts, the outlook is likely to be subdued.

However, let’s also incorporate the other shorter-term variables, narrative and immediate visibility in this mix. From a global perspective, it appears that Trump-led US-centric policies, along with interest rates, are likely to garner substantial attention, which is likely to raise threats and create opportunities.

India continues to be the fastest-growing economy in the world, struggling for growth and elevated interest from domestic investors. When we combine all these factors, we could expect 2025 to be an eventful year with higher volatility but moderate in terms of price performance.

Q. What key drivers will shape the markets in the new year?

Sanghavi: Key global drivers are likely to be interest rates, Trump policies and strong USD. Locally, earnings growth, continued interest from domestic investors and policy reforms are likely to be the key drivers for 2025.

Q. The broader markets continued to outperform in 2024. Do you think this trend will continue in 2025, and what factors could drive it?

Sanghavi: We have witnessed a sizeable expansion of valuations in the broader market whilst waiting for commensurate earnings performance. Part of this is also due to the lack of adequate float with consistent flows in mid- and small-cap funds pushing up valuations. Fundamentally, in our view, investments done at higher valuations increase the gestation period in terms of holding for accomplishing your desired rate of return. Our comfort on large caps is relatively higher than that of broader markets.

Q. Which sectors are poised to lead in 2025, and what makes them stand out in the current economic landscape?

Sanghavi: IT, consumer durables, telecom, financial services, structural reforms-led defence and renewables and select pharma and CDMO are the sectors we like for 2025.

Q. Given a budget of Rs 10 lakh, how would you suggest an investor allocate their funds in the new year, considering the current market environment?

Sanghavi: A focussed and disciplined approach towards asset allocation should be followed. The right mix would largely depend on the appetite for risk-taking, in conjunction with respective financial goals.  

Q. What risks or challenges should investors watch out for in 2025, both domestically and globally?  

Sanghavi: We would be entering an era of volatility with respect to trade policies emanating from the US. This is likely to entail a strengthening of dollar and weaker commodity prices (oil) amidst slowing global growth. This is likely to have an impact on our GDP and earnings growth. All this comes at a time when we are at relatively higher valuations. While these are risk factors and challenges, India continues to be relatively better placed.  

Q. How do you think the developments in the US and global geopolitical tensions might impact the Indian markets in 2025?

Sanghavi: Tariffs are extensively discussed, as well as their potential impact on trade and inflation. The Fed may be at a crossroads with new dispensation, leading to elevated global volatility in terms of capital flows. Potential cuts in corporate taxes in the US are leading the flight of capital back to the US. Indian markets and other emerging markets may face the brunt of this in the shorter term. In all this, our relationship with the US can potentially help newer business opportunities from a long-term perspective.

Q. What are your expectations from Budget 2025?

Sanghavi: As we saw weaker GDP numbers in the last quarter, my expectations would be to see the thrust and measures to accelerate growth. This is easier said than done since commensurate revenue sources also have to be harnessed for the longer term. I would expect government policies to focus solely on “Making the Pie Bigger” as compared to a larger share of the existing pie. This eventually may have to come in by laser focus on “Ease of Doing Business” with overall lower rates of taxation.

Disclaimer: Views are personal