Domestic stock markets will face multiple challenges, including elevated valuations, reduced liquidity, and slower earnings growth in 2025. However, the stock market remains a viable investment opportunity, underpinned by the robust performance of the economy. The global and domestic economies are expected to do well in 2025 with no signs of recessionary risk in the medium-term.
As a result, despite the short-term cautious view, drastically reducing equity exposure is not recommended, as it could lead to long-term underperformance. Furthermore, factors such as market timing risk, over-churning, and transaction costs reinforce the case for a disciplined buy-and-hold investment approach.
The crux will be to maintain a deep presence in equity with a focus on high-quality stocks and sectors. The vital decision will be to hold or realign portfolios toward sectors poised to effectively navigate and overcome the challenges of 2025. Additionally, diversifying into quasi-assets such as REITs, INVITs, corporate bonds, and ETFs (sector-wise and cross-country) can be a prudent approach, offering periodic income and preserving capital.
Capital preservation will be a central investment theme in 2025. In equity, the safety of a stock emerges from its intrinsic value. Value stocks are those trading at low valuations and beta compared to long-term history and the broad market. High-dividend-yielding stocks are particularly appealing in such situations.
Companies with strong cash flows from operations (CFO), monopolistic qualities, and industry leadership are highly valued stocks. The top 3 stocks of a stable industry or companies having supremacy in a niche segment generally justify its tag as high quality. Value stocks and high dividend payers will be a big theme of 2025.
Private banks, IT and pharma have a decent outlook for 2025. Private Banks have a clean balance sheet compared to the rising non-performing assets (NPAs) in microfinance and MSME sectors. These sectors are expected to continue to benefit from the high GDP growth and are currently trading at low valuations compared to the last 5years.
Over the last 3 years, large private banks have underperformed compared to public sector banks (PSBs) and other financial segments. This was ldue to the improvement in PSBs legacy balance sheet issue, cheap valuation and rise in domestic inflow. This trend is expected to reverse amid the cautious sentiment around the 2025 stock market and amid rising NPAs.
The IT and Pharma sectors are supported by a stable business outlook from the US and the continued strength of the dollar, both of which are expected to persist. These sectors also serve as defensive play amid short-term stock market uncertainties. Within these industries, large-cap stocks offer a more favourable risk-reward balance, providing greater stability and resilience compared to mid-caps. Generally, mid-cap stocks in India are trading at a 60% premium to large caps, which are at a historical peak range.
Chemicals and defence sectors have been very weak, especially in the later phase of 2024. But a fresh view is that the valuations are becoming attractive on a long-term basis. The sector outlook is very strong, due to high volume growth and order book position. However, the Chinese bumping risk has to be reviewed. Similarly, renewables and electronics manufacturing services are positioned for substantial growth, driven by business scalability and expanding market opportunities. However, their supreme valuations make them a riskier proposition in the short to medium term, warranting a stock-specific investment approach.
In recent years, the consumer sector faced headwinds, including adverse weather, rising food inflation, and shrinking disposable incomes. Additionally, pent-up demand waned, while urban demand suffered due to slower wage growth, election-related reductions in government expenditure, and disruptions caused by the shift to quick commerce from traditional channels. The effect is expected to continue in Q3 & Q4 FY25.
The FMCG will likely benefit from favourable climatic conditions, robust rural and urban demand, and fair valuations, particularly with large-cap stocks trading below historical averages. Record-high kharif crop production and favourable post-monsoon conditions for the rabi season are expected to drive rural demand and ease food inflation. Urban demand will likely recover with accelerated government capex spending in the second half of FY25, making FMCG a good long-term call.
Other sectors, such as infrastructure, hold strong growth potential, supported by stable project financing, reasonable valuations, and increased government spending. The textiles sector emerges as a potential dark horse, and is poised to benefit from increased geopolitical uncertainties, declining input costs, and the adoption of the China Plus One strategy by global supply chains. Trends indicate a rise in fresh export orders.
First published in Mint
