The Month of November was a volatile month for the markets with wide fluctuations and the markets correcting nearly 12% from the top before bouncing back somewhat. Finally for the month the markets ended down by 0.31% and the Midcap Index was flat. The key event of the month was obviously the US Presidential Markets where the win of Donald Trump activated rally in the US Markets as well as Cryptocurrencies. The Indian Markets underperformed developed market economies as well as most Emerging Markets driven by slowing growth and continuous foreign investor selling.
The month also marked the end of the second quarter results season where the overall result delivery was below expectations with the most disappointments coming from consumer companies where the expected uptick in demand has got further postponed as well as financials where we saw slowing growth as well as uptick in NPA’s and asset quality deteriorations. Cement Sector company results were also much below expectations driven by low pricing power. Technology sector results were well received and the stocks also moved higher driven by optimism about global technology spending revival. Telecom Sector results were decent, most capital expenditure oriented companies either did well or gave strong growth outlook. Auto sector results were mixed and the sector is facing issues related to high inventory in the system although profitability has held up. Reliance results were below expectations as most businesses saw profit pressures. Large banks did well while mid and small tier financials saw clear pressure on their margins and asset quality and we saw HDFC Bank come back into significant outperformance after a long time as a result. We saw a significant sell off in PSU’s in general before some revival started in select PSU’s at the end of the month.
As we sit to write and take a view on the outlook for the year 2025 the key things to evaluate are things as they stand today and what could change going forward. Lets come to the Indian Context to start with . We have seen growth slowdown as a result of two factors, firstly the general elections that pushed back lot of economic activity and which was followed by a severe heat wave and then an extended monsoon where the monsoons stayed well into October. This combined with high food inflation kept both the consumption and investment cycle muted for the first two quarters. The festival season demand as per most companies has been strong and could mark the start of an improvement in the economic cycle. However consumption remains muted. Given that consumption expenditure has now been muted for over 2 years it is imminent that we will see a decent revival next year. Consumption often gets postponed as households see pressure on their budgets but then comes back and enters a multiyear growth cycle. The investment cycle remains strong with strong growth seen in the Real Estate segment, investment in infrastructure projects across the board except for Roads continuing to remain strong. Many banks and financials have seen some pressure built up in asset quality as was expected. However the main thing out here is that asset quality is much stronger than all previous cycles and the probability of any significant further deterioration is very low. Most large banks now take provisions actively and Net NPA’s of most large banks are well below 1% with banks like HDFC Bank, ICICI, Axis, SBI etc all near 0.4-0.5% which is very healthy. A strong financial sector is very important for economic growth as it is the fodder for growth.
Over the last two years we have seen the US Markets and other developed markets do much better than Emerging Markets. As a result today the speculative positions in long US Dollar are at a one year high and since funds flow chases performance the overweight in US Equities is extremely high. While many argue that valuations in India are not cheap valuations in most developed markets are also well above historical averages. Many are perturbed by the huge Foreign Funds outflow out of India and to some extent rightly so. Taxation increases are blamed for a large part of pick up in these outflows after the Union Budget. However its all about growth. If the Indian Economic growth picks up and remains strong at 7-8% we will automatically see foreign investors come back and by again. Mostly people expect that the trends will continue to remain the same as what they were in the near past. It is usually not the case.
Monetary Policy has started on the easing cycle across the world excluding India. Most developed and Emerging Market Central banks have done 2-4 rate cuts over the last few months. Indian Policy rates above core inflation are one of the highest in the world today. High cost of debt slows down the economy and restricts economic growth. However the RBI and MPC has refused to ease policy or push in liquidity into the system. Usually a 3-4% depreciation for the rupee has been at par and helped the economy maintain competitiveness as we are a huge trade deficit country. RBI has also not let the Rupee depreciate and this has also hurt economic growth by making exports uncompetitive when China continues to provide huge export subsidies. Monetary policy in India will also ultimately ease sooner than later and support economic growth. The exact timing is tough to predict as the RBI Governor has continued to be extremely hawkish. As I finish my article the GDP data for the second quarter has come out at a dismal 5.4%.
The earnings growth projections are now 6-7% below what they were at the start of the financial year as such Nifty EPS for this year is likely to be nearly 1060-1080 depending on how the last two quarters go and around 1200 for next year. As such Nifty Trades at 20X earnings of next year which is above historical valuations but nowhere in bubble territory. One important factor what analysts miss out is that the structure of the indices has also changed from being commodity dominated to new economy dominated over the last few years. This has taken the Nifty PE higher automatically. Many experts have also advocated investing in largecaps and not midcaps due to valuations concerns. However this is a very simplistic way of analysis. Select small and midcap companies will always continue to do well and that is where maximum wealth can be created via bottom up stock picking. Over the last three years the Nifty CAGR returns is around 10% which is not excessive by any stretch of imagination. Overall my point is that there are pockets of overvaluation however opportunities remain across many stocks and sectors.
Overall I do believe that opportunities remain strong and the year 2025 will be good for Indian Equities overall. Moderating inflation, lower inflation, an improved consumption and investment cycle all will be contributors. The only caveat is that the Union Budget should not further increase taxes under the guise of simplification of taxation. High taxation has been disastrous for consumption expenditure as well as impacted foreign fund inflows into the country. Many so called experts argue that our domestic investors are pumping in so much money into equities that we do not need foreign money. It’s a foolish view. As a developing economy that is capital starved we need as much foreign capital as we can get, atleast over the next few years. Lets hope better sense prevails with the government and electoral success does not lead to poor economic decisions which hurts long term growth. Post the current correction strong opportunities are presenting for investing which we should seek to capture.