The weak performance of corporate India in the September quarter, geopolitical factors, elevated valuations, strengthening of the US dollar index and substantial FPI outflows (in October and November) led to a jump in volatility in the fourth quarter of 2024. As the markets enter 2025, the volatility is unlikely to abate soon due to high US bond yields and a stronger USD index. These factors will keep the US markets attractive and prevent FPIs from sustained buying in emerging markets (EMs), including India.
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Risk factors
Experts are anxious about India’s macroeconomic health due to uncertainty over tariff and pro-growth policies of the new US government. Such policies are likely to be inflationary and could impact India’s current account deficit (CAD), INR-USD exchange rate, and the rate cut cycle of the US Fed and RBI. While CAD is expected to widen, the rupee will depreciate further against the USD. On the other hand, rate cuts are expected to be shallow for both the US Fed and India.
A recent JM Financial macro outlook report highlights the fact that uncertainty around US tariff policies will shape global dynamics in 2025. Changes in the global supply chain, driven by Trump’s policies, are expected to affect exports more than imports. With India’s import-heavy trade and a record $37 billion trade deficit in November 2024, CAD is likely to stay elevated. The report also raises concerns about muted consumption and stagnant income growth amid rising inflation.
Earnings expected to see a sharp recovery in the future
Moreover, other factors are expected to create challenges for equity markets in 2025. Peak margins in most sectors, limited levers for cost (input prices) benefits and market share expansion, weak household incomes, sluggish demand and high valuations are some of the reasons that are likely to impact markets in 2025, states a recent Nuvama report. The report also expresses concern about the loss of India’s share in FII flows to emerging markets due to its narrowing earnings differential with EMs.
Many positives
Despite multiple concerns, there are positives driven by emerging private capex, re-leveraging of corporate balance sheets, strong infrastructure spending, and gains in macro stability through fiscal consolidation. A recent India Equity Strategy report by Morgan Stanley expects India to be among the best-performing EMs in 2025.It lists a reliable source of domestic risk capital and expected earnings growth of 18-20% annually over the next 4-5 years as the key drivers for Indian equity markets. The report also mentions restructuring of GST rates, direct tax reforms, free trade agreements and focus on energy transition as other positives.While the 2024-25 earnings growth of Nifty 50 is expected to grow at a modest rate, recovery is expected with the support of healthy domestic GDP growth rate, decline in interest rates and a stable policy framework. An ICICI Direct report expects Nifty 50 to resume its double-digit earnings growth trajectory, with earnings over 2024-25 and 2026-27 expected to grow at a CAGR of 15%. It suggests investing in companies with the certainty of growth longevity, less susceptible to foreign shocks and with capital-efficient business models. Experts advise a diversified approach given the volatile equity market. A Geojit report suggests a multi-asset portfolio, allocating 60% to equities, 25% to debt, 10% to gold, and 5% to cash for seizing new opportunities. Within the equity portion, it recommends large-cap stocks.
Another report from Bajaj Broking used a conventional method of chart analysis to project the path of the Nifty in the coming year. It expects the Indian market to maintain its upward momentum. However, this upward movement is anticipated to be gradual and non-linear, with corrections expected along the way, which will make the overall trend healthy.
Sector-wise outlook
In terms of sectors, experts are positive on infrastructure, chemicals, defence, banks, building materials and defensives (pharma and healthcare, and FMCG).
Infrastructure
The sector will benefit from a sharp jump in the central and state government capex in 2025. An increase in the private sector capex will provide additional support. In terms of sub-segments, power T&D, renewables and transportation are expected to be major beneficiaries.
The power sector will be driven by consumption growth of 7% CAGR between 2023-24 and 2029-30, which is higher than the historical average. Moreover, increased capacities in both renewable and thermal segments will provide additional impetus to the power sector. The transmission space will get a boost from the Ministry of Power’s National Electricity Plan, which involves an investment of Rs.9.15 lakh crore.
On the other hand, a pick-up in new project announcements, favourable government policies (PLI, National Green Hydrogen Mission) and emerging equipment ecosystem will support the renewables (solar, wind, battery storage system) segment. India’s share of renewables is projected to increase from 41% in 2022-23 to 61% in 2029-30, states the ICICI Direct report.
In the transportation space, the Cabinet approval of high-speed road corridors, improving asset monetisation by the road ministry and improved credit availability from banks will benefit road players. However, high competition and the government’s focus on debt reduction at NHAI could impact the prospects of road construction players. A recent Nuvama report states that the developers (road construction companies) must work on segmental diversification to manage the challenges.
Chemicals
The sector had underperformed in 2023-24 due to muted demand, destocking, volatility in input prices, increased competition and dumping from China. Though there was slight recovery in volumes in 2024-25, the margins continue to remain under pressure. However, revival is expected in the future aided by the companies’ focus on valueadded products and opportunities in import substitution, states the Geojit report.
Also, robust domestic demand and likely benefit from a tariff differential, if the United States imposes higher tariffs on products from China, will provide an additional growth impetus. The Geojit report forecasts revenue, EBITDA and PAT CAGR of 12%, 19% and 30%, respectively, for the chemicals sector over 2023-24 and 2026-27.
India’s macroeconomic & market forecast
Inflation and interest rates are expected to come down in 2025-26.
Defence
The sector will benefit from the government’s focus on the indigenisation of defence equipment and impetus on upgrading its military capabilities to counter global and regional security challenges. Also, export opportunities, aided by policy reforms and initiatives on ease of doing business by the government will emerge as a key growth driver. Despite the recent correction, most companies are trading at premium valuations due to the long-term order pipeline and likely improvement in execution.
The capital outlay in the sector is expected to increase over the next five years, which will lead to strong tendering and awarding. The ICICI Direct report expects contracts worth Rs.8-10 lakh crore to be placed with domestic defence companies over the next 5-7 years. In addition, government policies like setting up of defence corridors, integration of MSMEs into the defence supply chain and substantial growth in AoN approval by the Defence Acquisition Council will improve the business outlook of defence companies.
Banks
The sector will benefit from the narrowing of credit and deposit growth, which will support margins. An ITI mutual fund report is positive on private sector banks due to reasonable valuations compared to the broader market, strong return ratios and improving capital adequacy levels.
India will continue to remain the fastest growing economy in 2025
Though PSU banks’ valuations are expensive relative to their historical figures, these are still reasonable compared with private banks. Despite valuation comfort, the Nuvama report also favours private sector banks over PSU banks due to their better contingency provisions and relatively lower leverage. Moreover, in PSUs, there is a risk to asset quality as they are more exposed to the vulnerable segments (retail ex-mortgage, agri and MSME).
Building materials
The sector includes cement, cables, wires,tiles and plywood. The ability of cement companies to increase prices to support their profitability, and easing competitive intensity due to consolidation are expected to benefit the cement sector. On the other hand, rapid urbanisation, expanding residential and commercial real estate sectors and rising demand for furniture and interior décor will drive the performance of tiles and plywood companies.
The wires and cables segment is experiencing robust growth, driven by significant infrastructure development, an expanding energy sector, telecommunications advancements, and the rise of electric vehicles. The Bajaj Broking report expects the wires and cables market to grow at 15% CAGR from 2023 to 2028.
Defensives
Among the defensives, the pharma and healthcare sector is favoured by most experts due to the rising healthcare spending, supportive government policies, growth in R&D spending, and benefits from the anticipated US Biosecure and weaker rupee. (For more details on the pharma sector outlook, refer to the ET Wealth edition dated 30 December 2024).
Volatility impacted the relative performance of Indian markets in 2024
On the other hand, experts have mixed opinions on the outlook for the FMCG sector. According to the Geojit report the premiumisation strategy of FMCG companies, likely improvement in rural demand, aided by above-normal monsoons in 2024, and expectations of a revival in urban demand, supported by central and state expenditures, will lead to a revival in 2025.
The Nuvama report, though overweight on FMCG, states that after Covid-19, the FMCG companies’ defences and distribution moats have been broken. The report looks to lower the exposure once better risk-adjusted opportunities emerge elsewhere.