Retail investors propel markets to 10% gains in 2024: Focus shifts to defence and energy for 2025

The most significant development in 2024 was the rise in retail participation, which transformed market dynamics. This surge drove mutual fund inflows, even into stocks lacking strong fundamentals. Despite heavy FII selling, the market closed in 2024 with approximately 10 per cent gains, driven by retail investors. Post-Covid job scarcity spurred this trend as people sought secondary income, aided by internet platforms and SIPs. Retail participation has reduced the market’s reliance on foreign investments, with domestic inflows sustaining momentum.

FPI selling hit an all-time high in December 2024, with total FII outflows at ₹15,020 crores, offset by institutional buying of ₹4.9 lakh crores. Despite a 10 per cent market gain in 2024, sustained FII outflows are concerning as India, an emerging economy, still relies on foreign investments. Selling pressure stems from stronger economies like the US and UAE and the rupee’s depreciation, which reduces foreign investors’ returns. For example, a 10 per cent gain in Indian markets may translate to only 3-4 per cent after currency conversion. This devaluation impacts India’s global credibility and market stability.

In 2024, Nifty Realty gained approximately 38 per cent, Nifty Pharma 35 per cent, Nifty Consumer Durables 34 per cent, Nifty PSU Sector and IT 23 per cent each, Nifty Auto 23 per cent, Nifty PSU Banks 16 per cent, Nifty Oil and Gas 13 per cent, and Nifty Metals around 10 per cent. Meanwhile, Nifty FMCG and Nifty Media posted negative returns. In 2025, sectors with downturns may offer recovery opportunities due to attractive valuations. Defense, Energy, and Agro are expected to dominate, driven by budget focus. Energy holds growth potential as demand outpaces current capacity, Defence may see higher allocations, and Agro could benefit from import bans and a push for domestic production. 

Key macro factors include global conflicts and RBI policies, which are critical for the Indian economy. With rate cuts in England and the US, India faces indirect pressure. Higher rates risk reduced liquidity, while rate cuts may fuel inflation. This dilemma led the RBI to cut the CRR by 50 BPS to boost liquidity. The rupee’s depreciation adds risk, especially after Donald Trump’s warnings of trade restrictions with BRICS. This could potentially affect India’s exports to the US in sectors like cement, impacting growth.

The 2025 market outlook is cautious, hinging on key technical levels and rupee strength. A Q1 close below 22,000 with a weak rupee may limit returns to 4-5 per cent, not exceeding 6 per cent. Conversely, hitting 22,000 with a stronger rupee could offer dip-buying opportunities, as Nifty would trade at a Price-to-earnings ratio of approximately 18, marking a 15 per cent decline from highs near its 20-month EMA. This 15-20 per cent dip could attract buyers, but correction severity depends heavily on FII behaviour, which is closely tied to rupee strength.

Economic growth remains a concern, with GDP growth in single digits for seven quarters and companies reporting negative results recently. While government data shows improvement, company performances have declined over the past three months. Recovery is expected to follow a cycle of decline, consolidation, and recovery, potentially extending growth targets from one to two years. The gap between government data and company performance highlights deeper challenges and suggests a prolonged recovery timeline.

The four key sectors expected to outperform in 2025: Defense, Energy, Agro, and Pharma. In the Agro sector, companies like Shaktipump, which provides irrigation solutions, show promise due to increased focus on agricultural self-reliance and recent import bans on various products. The defence sector offers opportunities through companies like Data Patterns and HAL, driven by increased budget allocations. In the Energy sector, NTPC Green Energy stands out due to its role in government solarization projects and its status as a PSU subsidiary. The Pharma sector shows continued growth potential, particularly in generic medicines, with an increasing focus on R&D companies. These sectors are receiving particular attention due to their alignment with India’s self-reliance initiatives and the possibility of attracting more Foreign Direct Investment (FDI) to strengthen these areas. 

The long-term market outlook hinges on increasing retail participation, currently at 7 per cent compared to developed nations. This low penetration offers growth potential as financial education and access to company analysis improve. Energy remains a crucial theme due to production capacity limits, while Defense is set to grow with rising security needs and budgets. Pharma shows promise in generics and R&D, and Agro remains vital for India’s self-reliance. These sectors drive demand and attract foreign investments.

In 2024, NIFTY ETFs outperformed the NIFTY index, delivering 30-45 per cent returns compared to the index’s 10 per cent gain. The NIFTY mid-select also showed resilience during benchmark declines, attracting funds to strong companies despite declining main board weightage. ETFs are ideal for passive investors due to better returns and low charges. While PSU and other thematic sectors performed well, these investments carry higher risks and need regular monitoring. Investing in thematic funds via mutual funds is advisable, as professional managers can handle the patience and time required for these themes to play out.