2HFY25 - Market strategy and outlook

(Note: I had last shared my investment outlook and strategy for the second half of the year 2024, July 2024. Since then, there have been some changes in circumstances. Global central bankers have embarked on a policy easing path after more than a year. Geopolitical conditions have worsened. Stock markets have done very well and are close to the upper bound of fair value territory. Global economy is slowing down as the post Covid stimulated demand is waning. Accordingly, the corporate earnings growth trajectory is also flattening. I had accounted for most of these occurrences in my investment strategy in July 2024. Therefore, there is no notable change in my outlook and strategy for 2HFY25.)

In my view, the stock market outlook in India, in the short term, is a function of the following seven factors:

(1)        Macroeconomic environment

(2)        Global markets and flows

(3)        Technical positioning

(4)        Corporate earnings and valuations

(5)        Return profile and prospects for alternative assets like gold, real estate, fixed income etc.

(6)        Greed and fear equilibrium

(7)        Perception about the political establishment

The outlook for these seven factors for next 6-9 month is as follows, in my view—

Macroeconomic environment – Positive

My outlook for the likely macroeconomic environment in 2HFY25 is as follows:

(a)        Inflation: The consumer inflation may average close to the lower bound of RBI’s tolerance bound of 4% to 6%.

(b)        Fiscal Deficit: The fiscal situation of the central government may remain comfortable as the tax collections remain steady and revenue expenditure is controlled further.

(c)        Rates: Expect benchmark yields to average in the 6.85% +/- 15bps range. The RBI may stay on ‘pause’ for now and begin easing in 4QFY25. Deposit and lending rates may stabilize around current levels, the liquidity may ease in the forthcoming busy season as government spending accelerates.

(d)        Current Account: Expect current account balance to stay negative as import growth continues to outpace exports. The deficit may average around 1.25% to 1.5% for 2HFY25.

(e)        Savings: Household savings may continue to grow at a slower pace as real wage growth remains poor. Aggregate corporate savings though may be higher due to continued deleveraging and rise in free cash flows.

(f)         Investment: The government investment expenditure may sustain at current pace. Private capex may not see material recovery in 2HFY25. Overall, investment growth may be decent.

(g)        Exchange Rate: USDINR may average close to INR83.65 +/- 1 range.

(h)        Growth: The real GDP growth for FY25 may average around 6.75% despite a slower global economy, on the back of better manufacturing and good monsoon. Overall, macroeconomic outlook is positive.

Global markets - Neutral

The global analysts and economists are nearly unanimous on the growth decline in 2HFY25. The likely monetary easing and stable geopolitical conditions may support growth stability. The outlook for USD is neutral as central bankers remain on a corrective path.

Technical Positioning – Negative

Technically, in my view, the benchmark indices may witness a decent correction in 2HFY25. At present level thus Nifty offers a negative risk reward.

Technically speaking, Nifty may move in the 18910-26930 range in 2HFY25, averaging above 22635. There could be occasional violations of this range. Buying below 22700 will therefore carry a positive risk reward.

Corporate earnings and valuations - Neutral

The earnings growth momentum is peaking after three years of strong show. The visibility of margin improvement is clouded as capacity utilizations are high and companies are initiating expansion plans. Raw material prices are also now ticking up.

The present forward valuations are slightly above long-term averages based on still marginally optimistic earnings forecasts. However, 2HFY25 may not witness a material PE derating as macro fundamentals remain strong and visibility of flows is improving.

Alternative return profile - Neutral

Real estate: Real estate prices may not rise materially in 2HFY25 as more supply hits the market higher interest rates begin to bite and government incentives are withdrawn gradually.

Gold: Presently, the geopolitical and trade tensions are driving the global gold prices higher. We may see further rise in 2HFY25. However, on a 2-3 years horizon, gold offers a neutral to negative risk reward.

Cryptocurrencies: In the past couple of years, Cryptocurrencies have emerged as a notable alternative asset class. Being a new asset class the level of understanding and awareness about this asset class is still low, though the participation has risen exponentially. This combination of low understanding - high participation makes it highly volatile. Nonetheless, its popularity remains high and this trend may continue in 2HFY25 as well.

Fixed income: The corporate bond yields and deposit rates appear to have stabilized and may see some downward bias in 2HFY25. The yield gap is now not material. Overall, in my view, the return profile of alternatives is neutral for equities.

Greed and fear index – Negative

Historically, the most successful, though intuitive, indicator of greed overtaking the fear in the market is sharp outperformance of small cap stocks over large cap stocks. Besides, the volatility index, another gauge of fear, has remained low despite several concerns emerging.

The recent sharp outperformance of smallcap stocks and unsustainable euphoria in few pockets of the markets, indicate that greed is dominating the sentiments. The Greed and Fear balance therefore is negative presently.

Perception about the political establishment - Neutral

Strong commitment to promote manufacturing in India; positive outcome of thrust on self-reliance and firmly controlled fiscal balance is keeping markets’ perception about the political establishment positive. However, any significant losses for BJP in the assembly elections scheduled in 4Q2024 may require a review of this position.

Outlook for Indian markets

In view of the positioning of the above seven key factors, my outlook for the market in 2HFY25 is as follows:

(a)   NIfty 50 may move in a large range of 18910-26930 during 2HFY25. It would be reasonable to expect low single digit return for the 2HFY25 on diversified portfolios.

(b)   The outlook is positive for Metals, IT Services, Pharma, Specialty & Agro Chemicals, organized retail and consumer durables. Financials are neutral.

(c)    Benchmark bond yields may average 6.85% +/- 15bps for the year. Long duration yields may continue to do better in 2HFY25.

(d)   USDINR may average close to 83.65+/- 1 and move in the INR82.5-85.2/USD range.

(e)    Residential real estate prices may ease in most metro and large cities.

 

Some key risks to be monitored for the market in 2HFY25

1.    Weather conditions especially La Nina hitting the rabi crop.

2.    Worsening geopolitical situation in Europe and Asia.

3.    A recession forecast for FY26.

4.    Sharp rise in credit cost for lenders.

5.    Unusual rise in rural stress.

2HFY25: Investment Strategy

Asset allocation

2HFY25 appears to be worse than 1HFY25 as the market technical have worsened. Accordingly, I am keeping my primary investment objective to “low returns and capital preservation”. I believe that the market may continue to offer attractive opportunities to build a good portfolio for the period beyond FY25.

I shall continue to maintain standard allocation in 2HFY25; and increase active trading in my equity portfolio to optimize return. My target return for the overall financial asset portfolio for 2HFY25 would be 8% annualized.

Equity investment strategy

I would maintain a 60:30:10 mix of large, midcap and smallcap stocks.

(a)   Target 18% annualized appreciation from my trading portfolio;

(b)   Overweight on Chemicals (specialty and Agro Chem), IT Services, Pharma, organized retail and niche consumer stocks.

(c)    Underweight on financials and avoid PSUs.