As we start of the new year there are a large number of dynamics at play which will determine the course of the Stock Markets in the year 2025. As we look back the year 2024 was one of two halves (atleast in the Indian Context). The first half saw a strong rally which ignored all growth concerns and saw frenzy in many fancied sectors like PSU’s, Railways, Defence stocks etc. The second half was dominated by the rally in the US Dollar which pressurized most Emerging Markets and also by growing growth concerns as a result of which the markets ended lower for the second half of the year. While Nifty returned just 8.8% in 2024 we saw Mid and Smallcap Indices do much better at 23-24% returns. Overall Indian Markets trailed returns of most major stock market indices like S&P, DAX, Nikkei, Hang Seng etc by a wide margin.
The US Markets dominated performance for the year 2024 with the two year return of the S&P being the highest in the last 30 years. The Artificial Intelligence related frenzy was evident in the Technology Sector with the Nasdaq composite up over 30% for the year. As a result of US Dollar Strength, the sustained strength of the US Economy as well as the start of the easing monetary cycle we saw the global flows hugely skewed towards the US Markets. The Chinese Government continued to make noises around stimulus, reviving the economy etc but given the structural issues it is likely that Chinese growth will continue to slow over the next few years. On the flip side they are doing very good progress on EV Adoption, Clean Energy Investments, High Tech areas including AI etc which could hold them in good stead over the long run.
The Indian Economy continued to chug along but at a much lower rate than desirable to achieve actual per capita GDP improvements which would take us to the Middle Income group economies. Given our huge infrastructural investment requirements, low per capita consumption across most categories as well as demographics we can grow much faster with the adequate Fiscal and Monetary measures. Credit flow is a very important requirement to sustain strong economic growth. High Interest rates, tight liquidity and various restrictions by the RBI on Unsecured Lending, pushing banks to lower Credit to Deposit ratio etc slowed down the overall credit growth drastically over the last few months from over 15% to 11% by the end of December. On the Fiscal side while the strong adherence of Fiscal Deficit discipline is overall good to remove crowding out effect on private investments on a wholistic basis very high personal tax rates and GST rates has impacted consumption over the last two years and consumption demand continues to be muted. Investment led demand can only sustain the economic growth to a level but ultimately consumption needs to be strong to sustain growth.
Currently there are fears around US Policies under President Trump which could impact global economies. There is also a general belief that the US Dollar will continue to rally and pressure other economies. A slower pace of monetary easing from here on is also making many wary. Global Conflicts continue as they were without much change and the Chinese Economy continues to drag. In the Indian Context also lowered growth prospects from 7.2% six months back to 6.5% now has been a significant cut in GDP estimates.
So what could be the positives in 2025? In general most people extrapolate the past into the future. As such the consensus remains that the US Dollar will continue to rally and US Markets will continue to outperform all others. However this trend is unsustainable given fact that US Markets valuation premium over the rest of the world has grown substantially and if the policies under the new administration with a focus to reduce the fiscal deficit results in slower growth in the USA we could actually see other global markets outperform. Specifically in the Indian Context the current valuations are just slightly above long term valuations as far as the Nifty is concerned while there is froth still in some segments of the broader markets. Overall Nifty 3 year CAGR returns are now below 10%. Sentiments in the secondary markets are muted, however the IPO Frenzy continues with IPO’s coming at much higher valuations than listed established companies and getting lapped up as most have been giving listing PoP’s. I see many potential positives for India in 2025.
Firstly we will surely see an easing monetary policy cycle which by itself boosts growth with some lag. Consumer Demand has now been subdued for over two years and even if we do not get any tax breaks from the government there will be a natural recovery after a period of subdued growth. Rural Incomes are likely to be strong given the good agricultural growth prospects as well as higher farm product prices. A strong wedding season with higher number of wedding days is a natural demand booster and sustained lower inflation eventually does lead to higher consumption. While the investment cycle has been strong across many segments and should continue the growth has become disbalanced and we could see more balance come through. In my view it is very tough for the Union Budget to create any significant negative this time as expectations are very low. However if they realize that high personal tax rates are impacting growth negatively and provide relief there then it could be a significant positive. The year 2024 saw outperformance from the Technology and Pharma Sectors, while Pharma outlook remains good we need to see if Technology faces headwinds related to Visa’s or the impact of AI on IT Outsourcing. Overall I would enter 2025 with a glass half full rather than half empty attitude. We should see good investment opportunities in this year for long term wealth generation.
Sectorally consumption related stocks across durables and non durables have been subdued, financials have not done much, Auto Stocks have corrected significantly after an early year rally in 2024, largecaps like Reliance have underperformed significantly in 2024. We could potentially see all of them stage a revival in 2025. Many other fancied sectors like Railways, PSU’s, Solar related companies etc could have a tougher revival cycle. Select Defence stocks should stage a comeback after a decent sell off over the last few months. Opportunities remain in Capital Goods and Infrastructure companies. Given the large number of new listings of companies over the last two years the investing universe is also expanding and some new opportunities could come up as many of these companies correct from lofty valuations.
On an overall basis my best estimate of 2025 Nifty Returns is that we should be able to see markets return 10-12% as we stand today. A stronger growth cycle with more supportive policies could potentially boost these returns. I am happy with the last quarter market sell off in the year 2024. We need periods of below par returns to frustrate speculators and short term investors as that is what creates opportunities for long term investors to buy cheaper. If we are reasonably confident that a particular company and its stock will do well over 3-5 years then its better to buy it cheaper than more expensive in the short term.
Best wishes to everyone for the year 2025. I have a good gut feel about this year. Number 9 years are usually good and hopefully we will see the same play out not only in Stock Market returns but across all segments of life. Take care, focus on your health along with wealth.