As 2024 draws to a close, the broad market has delivered a respectable 20% return. Mid and small-cap stocks have outperformed, with midcaps achieving a 28% return and small caps 31%, compared to 17% for large caps. The outperformance is against the consensus that large caps are a better bet given the utterly high valuation of midcaps. Despite a slowdown in both the domestic and global economies, domestic investors remained optimistic. DIIs and retail investors invested a substantial ₹4.9 lakh crore and ₹1.1 lakh crore, respectively, up to November, supporting the strong performance of mid and small caps throughout the year.
The year began on a positive note, with corporate earnings growing robustly during the December 2023 results session, announced in January-February 2024. India’s corporate earnings growth was 25% YoY in December 2023, and this trend continued into March 2024, albeit at a slower QoQ pace, but sufficient to sustain the market rally. The nine months of the year were positive for the market, which rallied on the expectation of corporate earnings, pre- and post-national election results, and then post-election budget leading to a re-rate in valuation. India’s one-year forward P/E increased to 21.25x in September from 19.5x in January.
However, the trend shifted by the end of September as corporate earnings, which had begun to slow in June 2024, continued to decline, raising concerns about a potential structural issue in India. This led to significant selling by FIIs amid fears that India could no longer justify its premium valuations, with earnings growth limited to 6-7% in the first half of FY25, significantly lower than the over 20% growth seen in FY24. Over the past decade, India has consistently upgraded its valuations. The one-year forward P/E has rapidly expanded from an average of 15x in 2014 to 20x in 2024, in the last 10 years due to solid GDP & corporate growth compared to the rest of the emerging world.
FIIs selling was also triggered by the ‘Yen Carry Trade’ issue as yield started to strengthen in Japan, reducing the lucrativeness of trading in cross-country equity, especially for short-term bets. Selling peaked in October and November, during which domestic institutions absorbed the pain by investing a net ₹1.5 lakh crore in the cash market. The FIIs selling was much higher than the ₹89,000 crore witnessed in the January to April 2020 covid period. Currently, it is believed that FII selling has subsided, at least in the short to medium term. India’s corporate earnings are expected to improve in Q3 and Q4, compared to the subdued performance in H1, supporting a positive market outlook.
2025 Outlook
The current environment is generally favourable for equities. Both global and domestic economies are experiencing stable growth, albeit slower than the past three years, without significant structural damage, supported by fiscal spending and reduced geopolitical tensions. High inflation and interest rates are on a downside slope, which is expected to ease the economic threshold. Crude prices are subsiding due to a reduction in global demand, which is negative, but also because of a reduction in geopolitical risk and the rise of renewables, which is positive for India. For India, a point of concern is valuations, which continue to trade above the long-term range, making it crucial to be watchful of what themes and stocks to hold onto.
(The author is Head of Research, Geojit Financial Services)
Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
