Dear Investor,
In this edition of market outlook let us discuss the following:
· Valuations, and it continues to be time for alpha
· Look at the Macros
· Expectations on flows: Domestic and FPI
Valuations and it continues to be time for alpha
CY24 has been better than long period averages for the market with indices delivering mid-teens or better returns for Large, Mid and Small Cap part of the markets. Midcaps and Small Caps, particularly ahead of the general elections and the budget, have delivered positive returns. We had continued to repose faith in spaces which delivered higher earnings growth in line with our belief that market follows earning growth adjusted for valuations. The strong market performance has been in line with the earnings growth that is being witnessed in various parts of the market.
We believe that valuations are likely to be average for the Larger Cap part of the market. If the valuations remain average, return expectations align with the growth in earnings for the index.
In case we get lower interest rate environment, it may give a positive impetus to the market and vice-versa. Also if the policy environment results in better earnings outlook for India Inc. Equity investors it may help the market and vice-versa. Lower regulated rates do seem like a probable scenario in the New Year. Yes, Trump protectionist measures could be inflationary, but at 4.5%, bond yields may reflect the impact.

In India, RBI also could cut rates as we go deeper into the New Year as confidence increases that Trump era could also see rate cuts. Policy making may continue to be growth oriented in the Country and on this count also there may be a possibility for positive surprise. A risk is government spending driven sectors may see a squeeze as government strives to contain fiscal deficit further in line with the road map it has set for itself. Uptick in private sector capex would be closely watched to take over the growth mantle from the government.
We continue to believe that it is time for alpha. While indices may do their bit, the country could offer an alpha opportunity to managers like never before. We hold the belief that market follows earnings growth corrected for valuations. Alpha is created when a new space which offers a long period of strong earnings compounding emerges. Since the space is new, it is less represented in the indices and hence presents an alpha opportunity.
In the past periods, typically a period would witness emergence of one new space. For example, Software emerged in the 1990s, Private Sector Banks emerged in early 2000s, and Real Estate and Construction in the 2005-2008 period. However, over the past few years, we have seen emergence of several strongly growing spaces such as Electronic Manufacturing, Renewables, Electric Vehicles, New Tech, Luxury Consumption, Capital Markets, Defence, etc. and the list continues to expand. Data centres, nuclear energy and AI are expected to provide strong growth opportunity with time. This provides a better opportunity to build fully diversified portfolio of new high growth spaces only. This has been one of our strategies for our alpha generation over the past two years.
Look at the Macros
The macro backdrop is good. Oil prices are low, government seems to be on track to meet fiscal deficit targets, current account and forex reserves are in good shape. The global sentiment is to dis-engage with China to the extent possible and this may continue to provide better Indian market access to domestic companies. Yes, markets would have to digest volatility associated with the new regime in the US but there is a great chance that it could be positive. End of fiscal year and the budget are likely to bring with them the usual volatility but again the outcomes can be on either side.
The weakness seen in Q2, in part was on account of slower government spending and strong rains. Spaces like mining, construction and power generation which are directly impacted by monsoons, saw lower growth. In the second half, growth is likely to perk up as the benefits of a good monsoon percolate down and government spending gains momentum.
Geopolitical situation is likely to undergo a change towards peace with Trump in office. This could lead to a drop in oil prices which is good for a large oil importer like India.
As we had discussed before, Trump coming in is positive for two of the largest spaces in the market, Banks and IT. Banks could benefit as interest rates stay high for longer and IT could benefit as US INC invests tax savings into spaces like software. While we recognise this, we believe that the spaces we are invested in are offering significantly higher growth and hence we continue to be less exposed to Banks and Large IT.
Expectations on flows: Domestic and FPIs
FPI flows are likely not to be strong because US offers a very compelling story today. Interest rates in the wests are high. Besides, most EMs are seeing issues and have not delivered returns superior to that of the US, weakening the case further. We believe in that case for emerging markets may emerge after some time, once the yields drop in the US to say below 4% and the market prices in Trump corporate tax cuts and higher import duties (which could lead of better corporate profits immediately). We hence continue to expect FPI selling on overall basis.
The story of CY24 was domestic investors and the same is likely to continue in CY25.With rising per-capita incomes, India is changing from a country of savers to a country of investors and we expect this trend to strengthen and continue.
At the same time, we believe that it is sentiments that make the market move up or down rather than flows. CY24 has seen the maximum amount of money raised from the market through IPOs, QIPs, OFS, etc. However, in spite of large fund raise which sterilizes a lot of flow into MFs, the market has held its level and moved up.

It is now time for growth style of investing.
Returns are a combination of earnings growth and valuation adjustments. In value style of investing, generally growth is compromised in the quest for value and in growth style of investing, the opposite is largely true. One has to judge where a better combination exists. We believe that after 4.5 years of dominance by the value style on investing, with value drying up in the market, it is time for growth style to manifest itself. In the new year, the growth style of investing could benefit of tailwinds from drop in interest rates across the world.
In our portfolios we focus on spaces which are tail-winded and are potential growth leaders in the economy. Managers aim to pick some of the highest growth quotient names in these spaces where valuations are supportive. We believe that in the new year, our style is likely to benefit from these tailwinds. .
Thank you
Happy Investing
Wishing you all a very Happy New Year
May the Good Times Continue
Data as of Dec’24
Source: Bloomberg Consensus, Jefferies, EY, RBI, MOFSL, Nifty Indices,
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