Market Outlook for the month: Jan 25


2024: A Year of Milestones and Relative Market Resilience Amid Challenges:

The year 2024 was a remarkable one for Indian and global equity markets. The Indian stock market achieved a historic milestone on 26th September 2024, when the Nifty 50 index reached an all-time high of 26,216. This pushed India’s market capitalization beyond $5 trillion for the first time, making it the fifth-largest market globally. However, the market’s journey throughout the year was divided into two distinct phases.

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In the first half of 2024, Indian equities delivered robust returns, driven by favorable macroeconomic conditions, policy continuity, strong domestic and foreign liquidity, positive high-frequency economic indicators, and sustained corporate earnings momentum. In contrast, the second half of the year was marked by heightened volatility. Factors such as the ruling party’s underwhelming performance in the general elections, a slowdown in economic indicators, weaker earnings growth, and foreign investor outflows due to valuation concerns weighed on the market. Additionally, rising U.S. bond yields, a stronger dollar, and renewed competition from China created further pressure.

Despite these challenges, Indian equities demonstrated resilience. Broader market indices outperformed, with Midcap and Smallcap indices surging by more than 20%, respectively, while the Nifty 50 posted a more modest gain of 8.8%. However, the derivatives market faced significant setbacks. Regulatory changes, including higher margin requirements, reduced expiry days, and an increase in the Securities Transaction Tax (STT), rendered options trading unviable for many participants. These changes pushed some traders toward unregulated platforms, while others shifted their focus to positional trades or considered relocating to markets with more favorable conditions.

The derivatives market’s decline was compounded by liquidity challenges and increased volatility. Professional traders largely exited the space, and retail participation shifted to informal trading avenues, with daily volumes in these platforms reportedly soaring to unprecedented levels. This transition significantly impacted the overall market dynamics, leaving the derivatives segment a shadow of its former self.

In December 2024, the Indian stock market mirrored global trends, with large-cap indices such as the Nifty 50 and Sensex declining by 2%, in line with the 2.4% drop in the S&P 500. However, midcap stocks edged up by 1%, and small caps remained largely flat. The broader market’s mixed performance underscored the resilience of specific segments amidst broader market corrections.

Sectoral performance

In 2025, India’s consumption sector is set to thrive, driven by rising incomes and urbanization, with consumer durables, FMCG, and e-commerce leading the way. Healthcare remains strong, supported by increased health awareness and export demand for pharmaceuticals and generics. Banking and financial services are poised for growth, fueled by robust credit demand, digital innovation, and financial inclusion. The IT sector continues to benefit from global digital transformation trends, including AI and cloud services. Capital expenditure-linked sectors like infrastructure and manufacturing are likely to gain from rising investments, while banking emerges as the most undervalued large sector among Nifty indices.

In the following sections, we provide a more comprehensive examination and detailed insights of some major sectors:

Auto:

The Indian auto sector is expected to navigate a mixed performance trajectory in 2025, influenced by diverse trends across its segments. In December 2024, passenger vehicle (PV) sales grew 15-17% year-on-year (YoY) but declined 7-9% month-on-month (MoM), with growth largely driven by demand for entry-level and mid-segment vehicles. Conversely, commercial vehicle (CV) sales rose modestly by 4% YoY and 13% MoM, though a high base effect and moderate replacement demand are likely to limit growth in FY25.

The two-wheeler (2W) segment posted a 12.6% growth in domestic sales during Q2FY25, with exports showing notable strength. However, overall volumes remain below pre-COVID levels. Factors such as rural demand recovery and new product launches are expected to support double-digit growth in the segment. Meanwhile, the tractor industry displayed resilience, with December 2024 volumes rising 16% YoY, driven by robust rabi sowing, kharif crop procurement, and improved water reservoir levels.

Margins across the sector faced pressure in Q2FY25 due to operational inefficiencies, higher discounting, and lower domestic wholesale volumes, resulting in largely flat EBITDA margins YoY and a 32bps decline quarter-on-quarter. While margins are expected to stabilize in the near term, any improvement will hinge on a richer product mix.

Given the current landscape, the auto sector is poised for consolidation in the short term, with a cautiously optimistic outlook supported by gradual recovery in exports and sustained rural demand.

Banking:

The Indian banking sector is expected to experience steady growth in 2025, with credit growth projected to stabilize at around 11-12% for the fiscal year. Following a robust performance in FY24, where credit growth reached approximately 14% YoY, the sector is now shifting towards more cautious lending practices. A slowdown in unsecured lending segments, particularly in credit cards, personal loans, and microfinance, is anticipated due to ongoing asset quality concerns. Retail and SME sectors are likely to continue driving growth, while corporate lending, especially to large corporates, may remain subdued due to competitive pricing pressures.

Deposit growth has shown improvement, supported by gains in both CASA and term deposits, as banks focus on maintaining balanced loan-to-deposit ratios (LDRs). This approach aims to optimize cost of funds, especially in anticipation of a potential rate cut in the next 6-9 months. Net interest margins (NIMs) are expected to remain stable, with any significant changes dependent on the rate-cut cycle. Banks with a larger share of repo-linked loans may experience more pronounced margin pressure compared to those with higher proportions of fixed-rate or MCLR-linked loans.

Overall, while challenges in unsecured lending and asset quality remain, the sector is poised for steady growth driven by retail and SME credit demand, with banks maintaining a cautious but optimistic outlook. The focus on CASA deposits, prudent lending, and stability in margins will likely support the sector’s performance in 2025.

Chemicals: 

The chemical sector is likely to see a mixed performance in 2025, with pricing trends expected to remain stable after the sharp highs of the Covid period. Crude price fluctuations are anticipated to keep prices in a range-bound pattern. While overall pricing remains subdued, certain segments, particularly pharmaceutical APIs and CDMOs, are experiencing strong growth. Domestic market regulations, including anti-dumping investigations and minimum import price (MIP) impositions, may protect local manufacturers from unfair pricing practices.

Globally, chemical demand remains slow, with slight upticks in the US. While it is too early to declare a chemical upcycle, the end of the destocking phase and a potential re-stocking cycle may offer support, depending on demand momentum. Logistical challenges, including rising freight costs and labor strikes, continue to disrupt supply chains, but these are expected to be short-lived.

Indian chemical companies are anticipated to perform better in 2025, as demand improves and the destocking phase fades. The sector’s outlook is cautiously optimistic, with growth prospects driven by increased production, R&D, and product diversification. Companies focusing on niche segments, backward integration, and expanding their offerings stand to benefit from shifts in global supply chains.

Software:

The Indian IT sector showed early signs of recovery in Q2FY25, with a marginal improvement in demand. However, growth is expected to moderate in Q3FY25 due to seasonal furloughs and typical year-end softness. A key challenge for the sector is the absence of mega-deals, with increasing competition from global peers. After a period of strong growth in FY22 and FY23, Indian IT services are likely to face short-term demand and margin pressures due to macroeconomic uncertainties and a weaker outlook.

Despite these challenges, the long-term outlook for the sector remains positive, supported by signs of economic recovery. Technology spending is expected to pick up in the second half of FY25, particularly in core modernization, cloud, data services, and financial services, although the manufacturing sector remains weak. The BFSI segment emerged as a bright spot in Q2FY25 and is expected to maintain its momentum in Q3FY25, driven by increased tech spending by financial institutions.

Tier-2 IT companies might outperform their larger counterparts this quarter, while pricing pressures and shifts in revenue composition may put strain on margins. However, a cautious hiring strategy and improvements in demand, along with a favorable USD-INR exchange rate, should help mitigate margin pressures. As the sector adapts to emerging trends such as Generative AI, companies must focus on strengthening their position in digital transformation. The key to growth will lie in adapting to market shifts and leveraging new opportunities in the technology landscape.

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Important events & updates

A few important events of the last month and upcoming ones are as below:

  1. In November 2024, India’s infrastructure output saw a notable increase of 4.3% year-on-year, surpassing the revised 3.7% growth recorded in the previous month. This marks the highest growth rate in the last four months.
  2. In December 2024, the HSBC India Manufacturing PMI declined to 56.4 from 56.5 in November, marking the weakest expansion of the year. Growth slowed in output, new orders, and purchases, but overall expansion remained strong.
  3. India’s deposit growth stood at 11.5% in December 2024, compared to 10.7% in November 2024.
  4. The HSBC India Services PMI for December 2024 was revised to 59.3, down from 60.8, but remained higher than November’s 58.4. This marked the 41st month of growth, driven by stronger demand and a notable rise in new orders.
  5. The HSBC India Composite PMI for December 2024 stood at 59.2, slightly below the flash estimate of 60.7 but higher than November’s 58.6. It marked the 41st consecutive month of growth in private sector activity, with services leading the increase, while factory production growth softened.
  6. India’s economy is projected to grow by 6.4% in FY24/25, down from 8.2% in the previous year. This slowdown is attributed to weaker growth in capital formation and inventories, despite stronger private and government spending. Exports grew by 5.9%, while imports contracted by 1.3%.

Fundamental outlook: 

India continues to distinguish itself as a stable and resilient economy amid global volatility, benefiting from strong political stability following state elections and expected fiscal measures that are likely to bolster investor confidence. As we look ahead to 2025, the outlook remains optimistic, with growth expected to pick up momentum in the coming quarters. FY26 is anticipated to outperform FY25, driven by fiscal stimulus, a revival in private capital expenditure, and improving credit conditions following recent policy adjustments.

The earnings outlook is positive, with Nifty 50’s earnings projected to increase by 7.6% in FY25, followed by a stronger growth of 13.7% in FY26. Over the period from FY23 to FY27, the compounded annual growth rate (CAGR) for earnings is estimated at 14%. While potential risks such as global economic uncertainties, inflation pressures, and earnings adjustments in Q3FY25 exist, India’s underlying growth story, driven by stable political leadership and structural economic advantages, remains intact. In terms of market sentiment, 41% of stocks in the NSE 500 are trading above their 200-day moving average, which reflects a shift from the overbought levels observed earlier in the year.

The Indian market is expected to remain range-bound as we enter January 2025, influenced by external factors, including US economic policies and global market dynamics. Domestically, the Union Budget and potential RBI rate cuts will be key areas to watch. With real GDP growth forecasted at 6.4% for FY25 and nominal GDP growth at 9.7%, the Indian economy is poised to maintain its growth trajectory, supported by robust domestic demand and favorable fiscal and monetary policies.

Technical outlook.

From a technical perspective, the Indian market is currently in a consolidation phase. As of December 2024, only 41% of stocks in the NSE 500 are trading above their 200-day moving average, down from the overbought levels of 85-90% seen in early Q4. This suggests that the market has shifted from an overbought to a more balanced or even oversold position, with recent corrections primarily driven by global factors such as rising US bond yields and a stronger dollar.

Looking ahead to January 2025, the market is likely to experience continued volatility, largely influenced by global developments, including the US Federal Reserve’s monetary policy and other key economic events. However, much of the negative sentiment has already been priced into the market, and the focus is likely to shift toward domestic factors such as the upcoming Union Budget and the potential for RBI rate cuts. These developments, combined with fiscal support, capex revival, and an improving macroeconomic environment, could support stronger market performance in FY26. We expect earnings growth of 15%-16% for both Calendar 2025 and FY26, which could potentially lead to a re-rating of the market, with a higher PE multiple driven by renewed FII inflows and improved market conditions.

Outlook for the Global Market

US Market:

In 2024, US stock investors saw remarkable gains, driven by a combination of solid economic expansion, falling inflation, and a series of interest rate cuts from the Federal Reserve. The tech sector, particularly fueled by the AI boom, led the charge, with the NASDAQ up by 34%, the S&P 500 gaining 28%, and the Dow Jones Industrial Average advancing by 16%. While bond markets saw limited gains, the fixed-income space remained volatile due to shifts in monetary policy.

As we look ahead to 2025, the outlook for US markets appears more subdued. While economic growth remains robust, a significant portion of the optimism has already been reflected in stock prices, particularly within the technology sector. Corporate earnings in Q4 2024 will likely face challenges in exceeding high expectations, especially given the uncertainty surrounding President-elect Trump’s proposed policies. His tax reforms, including a corporate tax rate cut from 21% to 15%, could add pressure to the US budget deficit, while tariffs on foreign imports, particularly from China, could reignite inflation.

The Federal Reserve’s shift towards a more neutral stance in 2025, as core inflation reaches closer to its target, is likely to temper economic growth, which is expected to stabilize around 2.0%. Although the central bank is anticipated to ease rates gradually, the bond market could continue to face headwinds, with the 10-year US Treasury yield expected to rise above 5.20%. This may dampen investor sentiment towards equities and increase borrowing costs, which would further weigh on market performance.

Labor market challenges continue to be a significant concern for businesses, with shortages, hiring difficulties, and retention issues topping the list. While inflation has moderated overall, services inflation remains stubbornly high, particularly in sectors like healthcare and financial services. Trump’s administration could stimulate growth in cyclical and domestic sectors, but the risks associated with trade tariffs and immigration policies may provoke stagflationary pressures, compelling the Fed to reconsider its policy stance if the economy shows signs of weakening.

Given these conditions, although opportunities remain, especially in certain sectors, caution is advisable for 2025. The market is expected to remain volatile, and investors should adopt a diversified and balanced approach.

Outlook for Gold

Gold prices in India have been rising steadily, with 24K gold nearing Rs 79,000 for 10 grams, while 22K and 18K gold are priced above Rs 72,000 and Rs 59,000 per 10 grams, respectively. The start of 2025 has seen continued momentum for gold, with MCX bullion approaching Rs 78,000 in the commodities market. However, short-term volatility persists, reflecting broader market uncertainties.

The outlook for gold in 2025 is relatively neutral. While gold experienced a remarkable 27% increase in 2024, it is unlikely to replicate such growth in the coming year. Geopolitical risks and trade tensions may continue to drive demand for gold as a safe-haven asset, but the scale of price increases is expected to moderate. Central bank buying may continue to support gold prices, but broader market conditions, including inflation concerns and monetary policy shifts, could limit significant growth.

Given these factors, we have a neutral outlook for gold in 2025. While it remains a reliable asset for diversification and hedging against market uncertainty, we do not expect the same level of growth seen in 2024. Investors should consider gold as part of a balanced portfolio, but should not rely on it for substantial price appreciation in the near term.

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What should Investors do?

The year 2024 saw a mix of challenges, including global geopolitical tensions, domestic economic slowdowns, and shifts in key economies. Despite these obstacles, Indian equities, reflected in the Nifty Index, posted a solid high-single-digit return. As we move into 2025, although volatility is expected, the outlook remains cautiously optimistic, with several key drivers supporting future growth.

Domestically, India is in a phase of cyclical slowdown, with signs of weaker urban consumption, exacerbated by factors like general elections and extended monsoons. However, the rural economy is showing resilience, supported by a favorable harvest and monsoon season. This bodes well for consumption recovery in the coming months. Moreover, infrastructure development continues to be a key focus area, which should help stabilize growth.

Monetary policy remains a critical factor. Although the RBI is unlikely to implement rate cuts in the short term due to inflation concerns and a strong US dollar, there is potential for gradual easing by FY26, particularly if commodity prices soften and inflation stabilizes. In the meantime, the India-China dynamics, spurred by global trade policies, could present opportunities for India to attract investment as part of the “China-plus-one” strategy. With domestic liquidity still robust, FIIs are expected to re-enter the market later this year.Looking ahead to the coming months, Q3 FY25 results will play a pivotal role in guiding market sentiment. Earnings performance will be crucial in determining market direction, particularly as global and domestic factors weigh on investor sentiment. While near-term volatility is expected, the Indian market remains well-positioned for steady growth in the medium to long term.

Disclaimer:

This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.

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