If you were to get ₹10 lakh, what would be your investment strategy?
At this point of time, my equity allocation will be about 50%… About 25% would be towards gold or silver ETFs and 25% would be in fixed income. I am thinking personally for myself, considering my current asset allocation and my financial goals. But obviously it is different for different people.
In light of the recent human metapneumovirus (HMPV) outbreak in China, do you expect investors to hit the panic button, or should they remain calm and composed?
While this virus warrants serious attention, it’s not a cause for panic.
This year, we are coming on the back of four-five years of very strong gains in the market. So, this is the time to temper down expectations. There will be moderation in returns, on the basis of valuations, global macro, and even the domestic economy and corporate earnings are seeing some slowdown. So, I think it would be fair to say: keep expectations lower this year.
Besides Trump’s swearing-in and the Union Budget, what are the key events investors should monitor?
Aside from Trump’s policies, central bank actions are key. The US Federal Reserve is expected to continue rate cuts this year, though expectations have moderated to 50 basis points, with bond markets doubting even that.
Another critical factor is the Fed’s quantitative tightening, which has reduced its balance sheet from $11 trillion to under $3 trillion. So, when there was excess liquidity, the markets were able to stomach this. If US quantitative tightening continues, even when US bank liquidity and reserves run out, that can be something that could be a cause for the market.
India’s GDP
Another global factor to monitor is how China’s stimulus measures unfold. While some actions have been announced, further steps are expected after Trump’s policies and tariffs are clarified. If China opts for significant currency devaluation in response to increased tariffs, it could trigger ripple effects across markets, making currency wars a key concern.
Domestically, attention should be on India’s GDP growth momentum, which has been slowing. The latest advance estimate projects GDP growth at 6.4% this year. The trajectory of growth and corporate earnings will be critical areas to watch.
What are your expectations from the Union Budget?
What we will be looking at the pace of fiscal consolidation the government is undertaking. Over the past five years, there has been a major step-up in capex spending by the government and they have done the heavy lifting on the capex front already now. So, I think that part has played out.
Over the last two years, they have been pulling down the fiscal deficit. This year, the expectation is it will be at 4.9%, and next year, the target is 4.5%. We want to see what path they take. On the one hand, fiscal consolidation is warranted and welcome.
On the other hand, we also don’t want to tighten the fiscal side too aggressively because we are clearly seeing some signs of slowdown in the economy. We need to see that there is a calibrated slowdown or a pullback in the fiscal deficit during the year.
Aside from Trump’s policies, central bank actions are key… Another global factor to monitor is how China’s stimulus measures unfold… Domestically, attention should be on India’s GDP growth momentum
The second part is really consistency, continuity, and simplification of taxation. Last year, there was a change in the capital gains tax. So, I think that is another big factor to watch out for.
Do you expect a rollback of that?
I think we’ll be happy that it does not go up any further.
Do you anticipate any measures related to futures & options (F&O) in the budget?
The Union government accelerated some additional transactions last year, but more importantly, key actions have been taken by the regulators. These measures, announced in October, are currently being implemented. Some were rolled out in November, others were set to take effect from January 1, and a few will begin in February. These steps have already shown some moderation in addressing the excesses observed earlier.
Going forward, regulators are likely to monitor the impact of these measures to assess whether they meet their objectives. If not, additional actions may be considered. However, I don’t expect anything specific on this front from the budget.
Considering the Trump factor and the budget, what are the sectors that you like for 2025?
The market in 2025 will be a story of two halves. The first half will actually be more challenging… because there is slow economic growth and a slowdown in corporate earnings growth. We have seen that last two quarters earnings growth has been only about 6% or 7% for the Nifty. Even this quarter, it is likely that earnings growth will only be about 5% across multiple sectors, including auto, banks, and cement.
Better half
If you look at global commodity sectors like oil, gas and metals, all these will be reporting flat to negative earnings growth. So, while valuations of many of these sectors, particularly financials, are quite attractive, we will not have earnings growth supporting them. This is also in a time when global flows are not accommodative and the reason for that is how US yields continue to trend up.
By the second half, these headwinds should ease, with corporate India returning to double-digit earnings growth and presenting new opportunities. In the first half, smaller sectors with stronger earnings visibility such as travel, tourism, hospitality, healthcare, and EMS (electronics manufacturing services) are likely to perform better. In the latter half, lagging sectors like financials and consumer goods are expected to recover.
What are your thoughts on measures to boost consumption? Do you expect something on that front? Do you anticipate the government pushing capex in a huge manner or nothing major?
The government has significantly increased capex, with Central government spending rising from 1.5% of GDP a few years ago to nearly 4% today. However, execution challenges remain, as some budget allocations, like ₹56,000 crore for bond buybacks, limit further boosts.
Over the past five years, there has been a major step-up in capex spending by the government and they have done the heavy lifting on the capex front already now. So, I think that part has played out.
Corporate balance sheets are strong and underleveraged, suggesting the next wave of capex must come from the private sector. However, sluggish consumption and concerns over global overcapacity, especially in China, have dampened private investment appetite.
Encouragingly, substantial capex plans are emerging in newer sectors like renewable energy, EVs, battery storage, and green hydrogen. Translating these plans into tangible investments will be key in the coming years.
AI is frequently highlighted as one of the key focus areas. How do you approach capitalising on such themes? Are there other noteworthy themes beyond this?
India presents several emerging themes, though they often represent smaller pockets in the broader market. In healthcare, companies are focusing on innovation, with CDMOs (contract development and manufacturing organisations) securing increasing business opportunities and showing promising growth.
Changes in consumption patterns are another significant trend. These include the shift to quick commerce and evolving spending habits such as what consumers prioritise in their consumption baskets, from staples to newer categories. These shifts are opening up new opportunities.
Niche themes
Export-oriented industries, supported by the China-plus-one strategy, are gaining traction. Success has been seen in mobile phone manufacturing, with progress now extending to laptops and components, marking a substantial growth area.
The textile industry also shows promise, driven by the efforts of smaller companies, while premiumisation continues to perform well in sectors like travel, hospitality, and related areas.
Although these themes hold potential, they remain niche areas within the larger market landscape.
In 2024, we saw gold ETFs become quite popular. Do you expect this trend to continue in 2025?
Yes, I think so. The fact that gold as an asset class is coming back is significant. In an environment with a dearth of confidence in currencies, gold becomes an important asset. When global liquidity grows faster than global GDP, gold tends to perform well.
Another factor… has been the risk for central banks of holding all their assets in dollar terms, leading to increased central bank buying of gold. Major central banks, including those in countries like China and Saudi Arabia, have gold reserves constituting only a small percentage of their total assets. This leaves significant headroom for these central banks to increase their gold holdings.
Given these factors, particularly the central bank buying, gold will likely remain a strong asset in 2025.
In addition to gold ETFs, index funds and thematic sectoral funds gained significant attention in 2024. How can investors independently select the right ETF, index fund, or any other fund? Can investors still take advantage of trends such as the growth potential of gold ETFs and others?
Thematic funds and ETFs cater to sophisticated investors who understand market trends and seek specific opportunities. For most, flexi-cap or multi-cap products are better, as they avoid reliance on single sectors or capitalisations, which are prone to changing trends. Diversified strategies also mitigate the tax impact of individual trading.
In 2024, thematic funds gained popularity as index-heavy sectors like banking, IT, and consumer staples underperformed, creating better returns for these funds. However, for medium- to long-term, less-active investors, diversified strategies remain more reliable.
With faster market cycles and greater uncertainty, diversification is crucial. Cycles that once took years now occur in months, as seen in the volatile US markets. Diversification reduces risks and ensures potential gains, even during temporary underperformance in specific asset classes.
