6 Themes in Indian Stock Market Experts Are Bullish for Big Gains
Indian Stock Market: In 2024, the Indian equity market benchmark, BSE Sensex, saw a modest 8.2% increase, a significant drop from the 18.7% growth seen in 2023. This decline in performance relative to global markets can be attributed to the heightened volatility experienced since October of the previous year, which has caused the Indian benchmark to slip from being the eighth best-performing global index in 2023 to the 13th rank in 2024. This analysis is based on 22 world equity benchmarks covering regions such as the US, Europe, Latin America, and Asia, with data sourced from Reuters-Refinitiv.
Several factors have contributed to the increased volatility in the Indian market, including weak corporate performance in the September quarter, geopolitical tensions, high valuations, a strengthening US dollar index, and significant foreign portfolio investment outflows in October and November. As we move into 2025, experts predict that this volatility is unlikely to subside soon, driven by elevated US bond yields and a stronger USD index. These conditions are expected to maintain the attractiveness of the US markets and deter sustained buying from foreign portfolio investors in emerging markets like India.
There are concerns about India’s macroeconomic health, particularly regarding uncertainty surrounding tariff and pro-growth policies of the new US government. These policies could potentially lead to inflationary pressures, impacting India’s current account deficit, the INR-USD exchange rate, and the rate cut cycles of both the US Federal Reserve and the Reserve Bank of India. It is anticipated that the current account deficit will widen, leading to further depreciation of the rupee against the USD, while rate cuts are expected to be minimal for both central banks.
A recent macro outlook report from JM Financial underscores the impact of US tariff policies on global dynamics in 2025. Changes in the global supply chain, influenced by previous US administration policies, are likely to have a more significant effect on exports than imports, particularly concerning India’s import-heavy trade
Earnings are expected to experience a significant rebound in the future. However, there are several factors that could pose challenges for equity markets in 2025. According to a recent report by Nuvama, peak margins in most sectors, limited opportunities for cost reduction, weak household incomes, sluggish demand, and high valuations are some of the factors that may impact markets in 2025. The report also highlights concerns about India losing its share in FII flows to emerging markets due to its narrowing earnings gap with EMs.
Despite these challenges, there are positive developments in the market driven by emerging private investments, corporate balance sheet re-leveraging, robust infrastructure spending, and improvements in macroeconomic stability through fiscal consolidation. A recent India Equity Strategy report by Morgan Stanley predicts that India will be one of the top-performing emerging markets in 2025.
Key drivers for the Indian equity markets include a reliable source of domestic risk capital and an expected annual earnings growth of 18-20% over the next 4-5 years. The report also mentions potential positives such as restructuring of GST rates, direct tax reforms, free trade agreements, and a focus on energy transition.
The Nifty 50 is projected to experience modest earnings growth in the 2024-25 fiscal year. However, a recovery is anticipated, supported by a healthy domestic GDP growth rate, declining interest rates, and a stable policy framework. According to a report from ICICI Direct, the Nifty 50 is expected to return to a double-digit earnings growth trajectory, with a compound annual growth rate (CAGR) of 15% over the 2024-25 and 2026-27 periods. The report recommends investing in companies with sustainable growth prospects, resilience to foreign shocks, and efficient business models. Diversification is advised due to the volatile nature of the equity market.
A report from Geojit suggests a multi-asset portfolio strategy, with a 60% allocation to equities, 25% to debt, 10% to gold, and 5% to cash to capitalize on new opportunities. Within the equity portion, large-cap stocks are recommended for investment.
Bajaj Broking utilized a traditional chart analysis method to forecast the Nifty’s trajectory for the upcoming year. The report predicts that the Indian market will continue its upward trend, albeit gradually and non-linearly, with expected corrections along the way to maintain a healthy overall trend.
Sector-wise Outlook
Experts have a positive outlook on various sectors including infrastructure, chemicals, defense, banks, building materials, and defensives such as pharma, healthcare, and FMCG.
Infrastructure
The infrastructure sector is expected to benefit from a significant increase in central and state government capital expenditure in 2025. Additionally, a rise in private sector capital expenditure will further support the sector. Sub-segments such as power transmission and distribution, renewables, and transportation are anticipated to be the major beneficiaries.
The power sector is projected to experience a consumption growth of 7% CAGR between 2023-24 and 2029-30, surpassing the historical average. Furthermore, the power sector will receive a boost from increased capacities in both renewable and thermal segments. The transmission sector will benefit from the Ministry of Power’s National Electricity Plan, which involves an investment of Rs.9.15 lakh crore.
Moreover, an increase in new project announcements, favorable government policies such as PLI and the National Green Hydrogen Mission, and the emergence of an equipment ecosystem will support the renewables segment, including solar, wind, and battery storage systems. The ICICI Direct report predicts that India’s share of renewables will rise from 41% in 2022-23 to 61% in 2029-30.
In the transportation industry, the approval of high-speed road corridors by the Cabinet, along with efforts to improve asset monetization and increased credit availability from banks, will be advantageous for road players. However, intense competition and the government’s emphasis on reducing debt at NHAI could potentially impact the prospects of road construction companies. A recent report by Nuvama suggests that developers in the road construction sector should focus on diversifying their segments to effectively address these challenges.
The chemicals sector faced challenges in 2023-24, including subdued demand, destocking, price volatility of raw materials, heightened competition, and increased imports from China. While there was a slight improvement in sales volumes in 2024-25, profit margins remained under pressure. Nevertheless, the sector is expected to experience a revival in the future, driven by companies’ focus on high-value products and opportunities in import substitution, according to a report by Geojit.
Furthermore, strong domestic demand and potential advantages from tariff differentials, particularly if the United States imposes higher tariffs on Chinese products, are expected to fuel additional growth. Geojit’s report projects a Compound Annual Growth Rate (CAGR) of 12% in revenue, 19% in EBITDA, and 30% in PAT for the chemicals sector between 2023-24 and 2026-27.
Looking ahead to 2025-26, forecasts suggest a decrease in inflation and interest rates in India. In the defense sector, the focus on indigenous production of defense equipment and enhancements in military capabilities to address global and regional security challenges will drive growth. Export opportunities, supported by policy reforms and government initiatives to improve the ease of doing business, are expected to be key growth drivers. Despite recent market corrections, many companies in the defense sector are trading at premium valuations due to their long-term order pipelines and anticipated improvements in execution.
The defense sector is poised for significant growth in the coming years, with a projected increase in capital outlay leading to a surge in tendering and awarding of contracts. According to the ICICI Direct report, domestic defense companies can expect contracts worth Rs. 8-10 lakh crore to be placed over the next 5-7 years. Government initiatives such as the establishment of defense corridors, integration of MSMEs into the supply chain, and an increase in AoN approvals by the Defense Acquisition Council will further bolster the business outlook for defense companies.
In the banking sector, the narrowing of credit and deposit growth is anticipated to support margins, benefiting both private and PSU banks. Private sector banks, in particular, are viewed favorably by the ITI mutual fund report due to their reasonable valuations, strong return ratios, and improving capital adequacy levels. While PSU banks may have higher valuations compared to historical figures, they still offer reasonable value relative to private banks. However, private sector banks are preferred by the Nuvama report for their better contingency provisions and lower leverage, reducing the risk to asset quality.
The building materials sector, which encompasses cement, cables, wires, tiles, and plywood, is expected to see positive growth trends. Cement companies are anticipated to benefit from the ability to increase prices to support profitability, as well as a reduction in competitive intensity due to industry consolidation. Meanwhile, the demand for tiles and plywood is expected to rise due to rapid urbanization, expansion of residential and commercial real estate sectors, and increasing interest in furniture and interior décor.
Overall, India is projected to maintain its status as the fastest-growing economy in 2025, with various sectors poised for growth and opportunities for investors to capitalize on emerging trends.
The wires and cables industry is currently experiencing strong growth, fueled by extensive infrastructure development, a growing energy sector, advancements in telecommunications, and the increasing popularity of electric vehicles. According to the Bajaj Broking report, the wires and cables market is projected to grow at a 15% compound annual growth rate from 2023 to 2028.
In terms of defensive sectors, the pharmaceutical and healthcare industry is highly favored by experts due to the rising healthcare expenditures, supportive government policies, increased research and development spending, and potential benefits from the anticipated US Biosecure and a weaker rupee. For more information on the outlook for the pharmaceutical sector, please refer to the ET Wealth edition dated December 30, 2024.
The relative performance of Indian markets in 2024 was impacted by volatility. Experts have differing opinions on the future of the FMCG sector. According to the Geojit report, the premiumization strategy of FMCG companies, potential improvement in rural demand due to favorable monsoons in 2024, and expectations of a recovery in urban demand supported by government expenditures, are expected to lead to a revival in 2025.
However, the Nuvama report, while overweight on FMCG, suggests that the defenses and distribution advantages of FMCG companies have been compromised post-Covid-19. The report indicates a plan to reduce exposure to the sector once better risk-adjusted opportunities arise elsewhere.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.