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Style & Sector Rotation: Key to Navigate the Current Phase

Axis Top Picks Basket delivered excellent returns of 12% in the last year against an 8.2% return posted by Nifty 50 over the same period, beating the benchmark by a wide margin of 3.8%. The previous four months were highly volatile for the market, and a notable mixed performance was seen across sectors, market caps, and style indices. The Axis Top Picks basket declined by 6.5% in the last three months, led by volatility, while the Nifty 50 was down by 3.4% during the same period. It gives us immense joy to share that our Top Picks Basket has delivered an impressive return of 301% since its inception (May’20), which stands well above the 153% return delivered by the NIFTY 50 index over the same period.

Volatile Start for 2025: After closing a solid 2024 for the broader market, Indian equities saw moderation during January. A wider correction was seen in the broader market as compared to large caps in the past month. With this correction, the market saw a recent bottom of 22,829 on 27th Jan’25, a correction of almost 13% from the top, which was seen on 27th Sep’24. During the same period, the broader market indices, including Midcap and Smallcap indices, corrected by 14% and 16%, respectively. A majority of the correction was driven by 1) FII selling, 2) A rise in US 10-year bond yields, 3) A rise in the dollar index, 4) Inflationary concerns due to US policies, and 5) A lack of positive news flows in the domestic market. Driven by the dominance of these negative factors, Indian markets entered an oversold zone on 27th Jan’25. On this day, 17% of the NSE 500 universe was trading above the 200- day moving average. Historically, whenever this number falls below 20%, the market tends to find a bottom for that period. Consequently, some breather rally was visible in the market in the last one week after the event. Nonetheless, the market will continue to follow the macroeconomic cues, and in that regard, style and sector rotation will play a meaningful role in alpha generation going forward.

Union Budget FY26: Consumption Bonanza – Delivering Growing Aspirations of Masses! The Union Budget 2025-26 was presented on Saturday by Finance Minister Nirmala Sitharaman. The expectations from the Budget were reasonably high as the Indian economy was facing signs of moderation in economic growth during H1FY25 due to a reduction in government spending, credit tightening in unsecured lending, consumption slowdown (especially in the urban areas), extended monsoon, and inflation. We believe the Finance Minister has laid the foundation for economic consumption growth by giving landmark tax rebates for individuals with income up to Rs 12 Lk, thereby providing a significant boost to the masses. The fiscal deficit for FY25 is now revised to 4.8%, 10bps lower than the projected number and is set at 4.4% for FY26. Overall, we believe the Union Budget has played a balancing act between maintaining fiscal discipline and supporting consumption-led demand in the economy.

The past decade was defined by development-focused schemes, with the construction of roads, bridges, metro systems, and other infrastructure projects serving as benchmarks for the ruling party's success. However, the capacity creation phase came with challenges, resulting in lower allocation to social schemes. Hereon, with this budget's increased emphasis on consumption, the focus is directed towards the rural, the masses, and the middle class for spurring consumption, indicating a shift in the economic regime. Consumption-led growth will have a cascading effect on the economy and provide a much-needed boost to the private capex, which has been sluggish for several years. This is expected to positively impact consumption-related stocks, while some moderation is anticipated in capex-related stocks. With this development, some incremental allocation of smart money is likely to shift towards certain consumption pockets in the upcoming quarters.

The current level of India's VIX is below its long-term average, indicating that the market is currently in a neutral zone (neither panic nor exuberance). Meanwhile, the medium- to long-term outlook for the overall market remains positive. However, we may see volatility in the short run, with the market responding in either direction due to global volatility. Keeping this in view, the current setup is a ‘Buy on Dips’ market. We recommend that investors maintain good liquidity (10%), use any dips in a phased manner, and build a position in ‘Growth at a Reasonable Price’ & highquality companies (where the earnings visibility is relatively high) with an investment horizon of 12-18 months.

Based on the recent developments, we have made multiple changes to our Top Picks Recommendations. This includes the removal of Aurobindo Pharma, Gravita India, Sansera Engineering, Chalet Hotels and J Kumar Infra, and the addition of Trent Limited, Hero Motocorp, Max Healthcare, and Indian Hotels. Our modifications reflect the changing market style and slight shift towards the consumption and large caps play.

Our Key Themes

Key Monitorables in H2FY25: Most of the events are now behind us, with most of the negatives related to earnings already factored into the price. Hereon, the market will closely monitor the global developments around the following events: 1) Policies in the US government during the Trump presidency, 2) Trade policy, 3) Further rate cut by the US FED in 2025, and 4) The direction of currency and oil prices in 2025.

On the domestic front, the market will closely monitor developments around the rate-cut trajectory in India. We anticipate one to two rate cuts from the RBI in 2025, contingent upon inflation trends and the broader growth dynamics. These events are expected to keep the Indian equity market volatile, and it could respond in either direction based on these developments. Nonetheless, we continue to believe in the long-term growth story of the Indian equity market. The increased capex outlay would boost banks' ability to drive credit growth, which we believe is well-supported by a favourable emerging structure. However, with current valuations offering limited scope for further expansion, growth in corporate earnings will be the primary driver of the market returns going ahead. Hence, bottom-up stock picking with a focus on ‘Growth at a Reasonable Price’ and ‘Quality’ would be key levers to generate satisfactory returns in the next one year.

We maintain our Dec’25 Nifty target at 26100

Base case: We continue to believe that the Indian economy lies in a sweet spot for growth and continues to be a stable haven amidst the volatility of the global economy. We continue to believe in India’s long-term growth story, driven by the country’s favourable structure, credited to the increasing Capex and the consumption boost in the recent Union Budget which is enabling banks to improve credit growth. This would ensure that Indian equities will easily manage to deliver double-digit returns in the next 2-3 years, supported by double-digit earnings growth. Against this backdrop, we foresee Nifty earnings to post excellent growth of 14% CAGR over FY23-27. Financials will remain the biggest contributors for FY25/26 earnings. In our base case, we assume the continuation of the political stability in a coalition government, faster GDP growth rate vs. other emerging markets, stable monsoon, stable oil prices, and one to two rate cuts of 25bps each in the next one year. In our base case, we roll over the Nifty target to Dec’25 to 26,100 by valuing it at 20x on Dec’26 earnings. The current level of India's VIX is below its long-term average, indicating that the market is currently in a neutral zone (neither panic nor exuberance). While the medium to long-term outlook for the overall market remains positive, we may see volatility in the short run, with the market responding in either direction. Keeping this in view, the current setup is a ‘Buy on Dips’ market. We recommend that investors maintain good liquidity (10%), use any dips in a phased manner, and build a position in high-quality companies (where the earnings visibility is quite high) with an investment horizon of 12-18 months. 

Bull Case: In the bull case, we value NIFTY at 22x, translating into a Dec’25 target of 28,700. Our bull case assumption is based on the Goldilocks scenario, which presumes an overall reduction in volatility and the success of a soft landing in the US market. At present, we find ourselves at the start of the rate cut cycle, and the outlook for a soft landing has notably strengthened over the last one to two months. The market is keenly watching the global growth scenario in 2025 under Trump's presidency. Furthermore, the private Capex, which has been sluggish for the last several years, is expected to receive a much-needed push in the upcoming years with an expectation of policy continuity. Backed by expectations of political stability, policy continuity, fiscal prudence path, improving private Capex cycle, rural revival, and soft landing in the US market, Nifty earnings will likely grow at 17-18% over FY23-27. This would augur well for capital inflows into emerging markets (EMs) and increase the market multiples in the domestic market. We believe the likelihood of this scenario is very high at the current juncture. 

Bear Case: In the bear case, we value NIFTY at 18x, translating into a Dec’25 target of 23,500. We assume the market will trade at above-average valuations, led by the likelihood of a policy shift in the Trump regime. Moreover, we presume inflation will continue to pose challenges in the developed world. Currently, the global market has not seen such levels of interest rates in the past. Hence, the chances of going wrong have increased significantly. Nonetheless, the direction of currency, oil prices, and development towards global trade is likely to put pressure on export-oriented growth in 2025. These developments will likely bring down the market multiple in the near term. However, the likelihood of this scenario appears slim at the current juncture.

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