(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, and cryptocurrencies, etc.
(6) Greed and fear equilibrium
(7) Perception of the political establishment
The outlook for these seven factors for the next
twelve months is as follows, in my view—
My outlook for the likely macroeconomic
environment in FY25 is as follows:
(a) Inflation: Consumer inflation
may average well within the RBI tolerance band of 4% to 6%. However, food
inflation may continue to be erratic and cause occasional violations of the
upper range.
(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. I do
not expect any significant deterioration in fiscal conditions due to elections
scheduled in April-June 2024. No major tax/duty concessions are expected. Any
major improvement in fiscal balance would depend on acceleration in asset
monetization. The outcome of the general election will be a key factor in this
regard. A change in regime could possibly push the FRBM Act targets further by
1-2 years.
(c) Rates: Expect benchmark yields
to average in the 7.2% +/- 30bps range. The RBI may remain on pause in the
first half and may deliver a 35-50bps cut in the second half depending upon the
monsoon and global trend. No major change may be seen in deposit and lending
rates as liquidity remains tight and credit demand remains elevated.
(d) Current Account: Expect the current
account balance to stay negative for most of the year as import growth
continues to outpace exports. The deficit may average around 1.3% to 1.6% for
FY25.
(e) Savings: Household savings rate
may continue to decline as real wage growth remains poor. Aggregate corporate
savings may also decline as capacity utilization increases and corporates
embark on capex plans.
(f) Investment: The government
investment expenditure may slow down in 1HFY25 due to fiscal constraints and
election-related restrictions. Private capex may maintain its 2HFY24 trajectory.
Overall, investment growth may see decent growth in FY25.
(g) Exchange Rate: USDINR may
average close to INR84 +/- 1 range on a negative current account and elevated
inflation.
(h) Growth: The real GDP growth for
FY25 may average around 6.25% +/- 50bps despite a slower global economy. A poor
monsoon could impact the growth negatively by 50-60bps.
Overall, the macroeconomic outlook is neutral.
Markets: Global
analysts and economists are nearly unanimous on the growth recession in FY25. Most
markets are currently pricing some rate cuts and monetary easing to mitigate
the impact of economic slowdown. Any disappointment on this count may impact
global markets adversely.
Flows: The
outlook for the USD is now neutral as the US Fed is not expected to deliver
aggressive rate cuts. Flows towards emerging markets may therefore remain down in
FY25 as yields in developed markets remain attractive.
In my view, the benchmark indices may go
through a technical correction in 1QFY25. The indices offer a balanced risk-reward
at the current level. A correction of 6-8% would make the market attractive
again.
Technically speaking, Nifty may move in a wider
range of 18475-24995 in FY25, averaging above 19885. Buying below 20650 will
carry a positive risk reward.
The earnings momentum may slow marginally as banks,
energy, and metal earnings growth peaks in FY25. No major acceleration in
earnings is expected from FMCG companies. Power, Capital goods, and Pharma are
the notable sectors that are expected to deliver a decent delta in earnings.
Overall, expect a 15-17% earnings growth.
The visibility of the improved margins
sustaining is decent. Higher capacity utilization may warrant capex, hence the
beginning of a re-leveraging cycle from FY25. RoE therefore may not improve
materially in the next couple of years.
Real estate: Real estate prices rise cycle may peak in FY25 as higher interest
rates, withdrawal of tax incentives, and slowdown in demand due to slower
employment growth may weigh on demand.
Gold: Gold
prices have recently rallied on the back of expectations of rate cuts by
central bankers and persistent buying by some large central banks. A stronger USD
and resilient growth may halt the recent run-up in gold prices. Save for a
major geopolitical escalation, gold offers a neutral to marginally negative
risk-reward from the present level.
Cryptocurrencies: In the past few 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 FY25 as well.
Fixed income: The corporate bond yields and deposit rates may see some downward
bias in FY25, as policy rates peak and begin to descend. The yield gap that
favors bonds presently may be sustained for most of FY25.
Overall, in my view, the return profile of
alternatives is positive for equities.
Historically, the most successful, though
intuitive, indicator of greed overtaking the fear in the stock market is the
outperformance of small-cap stocks over large-cap stocks. The volatility index,
another gauge of fear, has however inched higher in the recent weeks.
The sharp outperformance of smallcap stocks in FY24
indicates that greed dominates the sentiments presently. This sentiment may
change in 2HFY25. The Greed and Fear balance therefore is unfavorable
presently.
Strong commitment to promote manufacturing in
India; the positive outcome of thrust on self-reliance, controlled fiscal
balance, and recent election victories are keeping markets’ perception about
the political establishment positive. The incumbent is forecasted to perform
well in the general elections. This may further strengthen the positive
perception.
Given the positioning of the above seven key
factors, my outlook for the market in FY25 is as follows:
(a) Nifty 50 may move in a large range of 18475-24995
during FY25. It would be reasonable to expect a low double-digit return for the
year on diversified equity portfolios.
(b) The outlook is positive for non-bank
financials, fossil fuels, construction materials, metals, capital goods, infrastructure,
specialized technology, pharma & healthcare, and modern retail. The outlook
for automobiles is neutral. FMCG and Chemicals may underperform in 1HFY25.
(c) Benchmark bond yields may average 7.20% +/- 30bps
for the year. Shorter end yields may continue to do better in 1HFY24, while
longer duration may do better in 2HFY24.
(d) USDINR may average close to 84+/- 1 and move
in the 82-86/USD range.
(e) Residential real estate price rise cycle may
peak in FY25. Commercial real estate may continue to perform better.
Some key risks to be monitored for the
market in FY25
1.
El Nino strengthening and adversely
impacting monsoon; leading to an unusual rise in rural stress.
2.
Material worsening of geopolitical
situation in Europe and Asia.
3.
A large credit event causing a market
freeze.
4.
A deeper recession in developed
economies that may spill into 2025 as well.
5.
Sharp rise in commodity prices due
to production/logistic disruptions; restocking; displacement of USD etc.
6.
General election results
contrary to expectations.
FY24
– Resilient growth and positive sentiments