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Executive Summary

* 2024 was a year of elections with more than half of world’s economy by GDP and population undergoing election including India and US. While India is broadly seeing policy continuity, it would be interesting to watch out for policies adopted by the new administration in US particularly on trade, immigration, deregulation, taxes and government expenditure. This will have a bearing on trade and financial markets globally.

* 2024 also saw a reversal of policy rate trajectory by US Fed which reduced fed funds rate by 100 bps in contrast to a 100 bps hike in 2023. On the other hand, RBI chose to take a pause while changing it’s policy stance to neutral and may ease repo rate in 2025 once it sees further moderation in inflation (particularly food prices) around it’s target band.

* China continued to grapple with its deep property crisis and suboptimal economic growth. It will continue to take all the measures at its disposal to revive economic growth and real estate market.

* Indian capital markets saw a record surge in primary equity issuances while domestic investors continued to be big buyers in secondary market. Foregin Portfolio Investors (FPI), on the other hand, have remained on the side lines owing to their discomfort on higher valuations. Any significant correction in Indian equities may lead to Foregin Portfolio Investor (FPI) inflows going ahead.

* Despite higher valuations at the start of the year, equities did well with mid and small caps delivering double digit returns. We may see a catch up in earnings growth going ahead which will drive returns in 2025. While equities remain the preferred asset class, asset allocation remains important.

Source: US Fed, Data as on 20th Dec 2024

Source: CEIC, Goldman Sachs Research, Data as of Dec 2024

Global Landscape

* US equities witnessed another year of higher double digit returns with S&P 500 and Nasdaq delivering 25% and 32% returns respectively on a Calendar Year Till Date (CYTD) basis (as on Dec 23, 2024). Chinese equities did well gaining 13% primarily on account of multiple stimulus measures which led to tactical FPI (Foreign Portfolio Investor) flows. On the other hand, Russia, Brazil and South Korea corrected by 13%, 10% and 8% respectively.

* US Fed reduced policy rate by 100 bps in, 2024 over the last 3 policy meeting at the back of significant moderation in inflation. Contrastingly, 10-year US treasury yield was trading ~65 bps and ~90 bps higher compared to January, 2024 and September, 2024 levels respectively. It is currently trading around 4.5% levels. The disappointment was mainly on account of forward guidance by US fed which indicated slower and lesser rate cuts in, 2024. In our view, the extent of rate cuts by US fed may be broadly guided by the evolving US policy on tariff and fiscal expenditure.

* China on the other hand, continued with a slew of measures both - monetary and fiscal, to support it's faltering economy and property market which has been in a downturn since 2021. China adopted an "appropriately loose" monetary policy marking it's first easing of stance since 2010 in addition to several interest rate cuts during the year. It also indicated to pursue a more proactive fiscal policy. While the measures are positive in the near term, their long-term implications remain uncertain. There is also an expectation that China could face additional US trade barriers post the new administration in US further accentuating the economic pain for China.

* While most of the central banks globally were on an easing interest rate path, Bank of Japan (BOJ) hiked its key short-term interest rates to 0.10% - it's first hike in more than a decade. This was followed by another rate hike taking its short-term interest rate to 0.25% level with BOJ's indication for further rate hikes. This spooked the financial markets globally on concerns of a likely unwinding of yen carry trade - the most popular carry trade strategy globally. However, the financial markets stabilized subsequently post affirmation by BOJ on less likelihood of further rate hikes.

Domestic Landscape

* GDP growth: Q3CY24 GDP growth saw some softness on account of slower growth in government capex, slowing credit growth and some weakness in urban consumption. Capex growth was slower on account of elections. Based on historical trends, capex growth tends to be slower in first half (H1) of an election year, but picks up sharply in second half (H2) of that fiscal. We are witnessing a similar trend this year as well with sharp pickup in the government capex over the past couple of months but it may undershoot the budgeted target. On the other hand, slow credit growth can be attributed to restrictive RBI policies on unsecured lending. On the consumption side, while urban consumption has shown some weakness, Rural economy is seeing some green shoots with pickup in sales for tractor & 2-wheelers, improving rural sentiments and positive real wage growth. Overall, India’s medium-term outlook remains intact supported by robust macro fundamentals. India’s Real GDP is projected to grow ~6.5% p.a. over the next 5 years.

Source: Central Statistics Office Of India, CEIC, IIFL

Research GDP: Gross Domestic Product

GVA: Gross Value Added

* Credit and Deposit growth: Credit and Deposit growth saw significant divergence during first half of, 2024 amid strong credit growth before converging in November. Credit growth fell sharply in second half of the year on account of RBI imposed restrictions on unsecured lending. Expected monetary easing in CY25 may help revive credit growth.

Source: RBI, Data as on 29th Nov 2024

* Liquidity: Liquidity conditions remained comfortable during most part of the year. RBI at its December, 2024 MPC announced a cut in CRR (Cash Reserve Ratio) by 50 bps in two tranches (25 bps each) effective Dec 14, 2024 and Dec 28, 2024 respectively in order to infuse more liquidity into the system.

* Inflation: Core inflation remained benign and has stayed below 4% over the past 12 months. On the other hand, food inflation which has been a cause of concern for the central bank is expected to stabilize going forward providing room for a supportive monetary policy in 2025.

* Currency & Forex Reserves: India’s Forex Reserves continue to remain robust while INR has been resilient on the back of stable macro environment. While, INR has shown some weakness post US elections but it may do relatively better in 2025 post the recent US Dollar rally.

* India’s Twin Deficits: Current Account Deficit (CAD) & Fiscal Deficit have remained under control. Government is expected to remain committed to the projected fiscal glide path while CAD is expected to remain contained around 1% of GDP supported by benign crude oil prices and government’s focus on manufacturing through Production Linked Incentive (PLI) & other initiatives.

Source: GOI, Avendus Spark Research, Equirus, CMIE, Data as on October 2024

* Market Performance: Indian equities did well on a CYTD basis with Nifty 50, Nifty Midcap 150 and Nifty Smallcap 250 gaining 9%, 23% and 26% respectively (as on Dec 23, 2024). Among sectors Healthcare, Telecom & Power were the top performers while FMCG and Banks underperformed. PSUs as a cohort outperformed. On Style front, Value outperformed while High Beta and Growth underperformed.

• Flows & Supply: Dosmectic Institutional Investors (DII) were strong buyers in the equity secondary market while FPIs turned net buyers at the margin. Monthly Systematic Investment Plan (SIP) flows in Mutual Funds (MFs) continue to see secular growth and crossed Rs 25,000 crores mark in October, 2024. Notably, MFs contributed to ~80% of net flows by DIIs in, 2024 on a CYTD basis. While the ownership of Indian households in equities has increased, it is still lower in comparison to global peers. Interestingly, while India’s weight in MSCI EM Index has increased significantly, FPI holdings in Indian equities are at a 10-year low making them underweight India. This could reverse if there is a significant correction in Indian equities going ahead.

On the supply side, 2024 witnessed record primary issuances (Rs 3.4 trillion CYTD) through IPOs, FPOs, OFS and QIPs. We may see this momentum to continue going into 2025 and may keep up with the demand given the strong pipeline.

Source: RBI, Trading Economics, Data as on 23rd Dec 2024

* Earnings & Valuations: After four consecutive years of healthy double-digit growth, earnings growth witnessed some moderation in past 2 quarters and FY25 full year earnings growth is expected to close in single digits. If we look beyond FY25, consensus estimates see a double-digit earnings growth for FY26 and FY27. The strength of earnings trajectory across different sectors and market caps will drive respective index performance. On Valuations front, India’s premium relative to world has come down while it remains higher relative to EM basket primarily on account of China de-rating. Based on 12-M forward PE (Price to Earnings) multiple, market cap valuations continue to trade at a premium to their respective LTA (Long Term Average). However, the recent correction in equities has made the valuations more palatable from a medium-term standpoint.

Outlook for 2025

* India’s medium to long term outlook remains robust driven by strong macro fundamentals deleveraged corporate balance sheets, robust asset quality, fiscal discipline, favourable demographics, digitization, rising income levels, etc. Household debt levels are also reasonable compared to global standards. India's aggregate debt to GDP is lower than in 2010, while it has risen globally.

* We remain constructive on equities from a medium-term perspective driven by strong profitability and free cash flows. Earnings growth may be a key driver of returns in 2025. Given that valuations are trading at a premium and there is froth in certain segments of the market, bottom up stock selection will be important.

* On the Sectoral front, we remain constructive on Banking & Financial Services given the reasonable valuations and higher return ratios ? ROE (Return on Equity) and ROA (Return on Assets). We are also hopeful of revival in consumption and positive on manufacturing given the Government’s thrust and China+1 strategy.

Source: RIMES, MSCI, Morgan Stanley Research, Data as on 30th Sep’ 2024

Source: RIMES, MSCI, Morgan Stanley Research; Data as on 30th Nov’ 2024

* Key things to watch out for in 2025: (a) US policy on trade/tariff, fiscal expenditure and deregulation (b) Rate trajectory by the central banks, (b) Oil price trend, (c) Geopolitical issues and (d) Recovery of consumption (e) Private capex growth including Real estate.

* While equities have delivered better returns, we would recommend investors not to extrapolate last three year returns and align their return expectations accordingly. It’s important to stick to the defined asset allocation driven by the risk appetite, financial goals and time horizon. Investors may continue to allocate in equities in a staggered manner via Systematic Transfer Plan (STP) /Systematic Investment Plan (SIP) with a long-term perspective. Depending on the risk profile, one may consider investing across market cap strategies. Hybrid funds, given their flexibility in asset allocation can also be made part of the core portfolio. In thematic funds, one may consider Consumption Fund for expected consumption recovery and Banking & Financial Services Fund given the decent risk-reward.

Source: Internal Research, BofA Global Research, Data as on Dec 2024

E: Estimated

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