Tell us your own assessment of how 2025 is likely to be. Do you think it is going to be much different than 2024?
Sumit Bhatnagar: See, what we need to realise is that we are coming out of a four years’ period of phenomenal growth, post COVID growth, where we have seen our economy growing at 8% plus. Our corporate earnings and broader markets have been in high teens and so have been the phenomenal returns in the markets.If you see our largecap at index level has given around 15% returns on a five-year cagr, while smallcap and midcaps have given almost double the returns.
So, now, we are in a situation where our investors are so used to these type of superlative returns that we need to bring down their return expectations a tad bit. Now, we are entering a period of more of a normalisation as I would say. Over the next two-three years, we expect the Indian economy to grow at around 6.5-7%.
Likewise, our corporate earnings should also be somewhere around low-teens over the next one or two years and that should set the tone for market returns as well. So, what we need to realise is that we are entering a period of slightly higher volatility. Multiple factors are driving this volatility. One obviously is the Trump presidency. He is the most unpredictable man and leading a $30 trillion economy, the world’s most powerful country, adds a significant bit to the uncertainty. Secondly, the US fiscal and monetary policy would also be a key driver of volatility in the markets. Currently, if you see, US is running a 6.5% fiscal deficit.
On top of it, Trump is talking about giving tax cuts and providing stimulus to the economy and at the same time he is also talking about imposing tariffs on Canada, Mexico, China. So, it would be interesting to see how the fiscal policy and monetary policy pan out because tariffs typically are inflationary in nature.
So, it would impinge upon the US Fed’s ability to cut rates going forward and that is what we have also seen in his commentary, in the Fed Governor’s commentary in the last call where they have already given 100 bps cut and are now going to be more calibrated towards the rate cuts.
Other than that, if you look at domestically also, the government has funded capex in a significant way over the last three years. But now with fiscal consolidation on the way, the current fiscal deficit is expected to be 4.9% and next year is expected to be anywhere between 4.2 to 4.4. So, your fiscal impulse is slowing down.
At the same time, your revex is increasing because of welfare spendings by state governments and central governments which actually is needed also to a certain extent. So, we are entering into a situation where your GDP growth may slow down a bit likewise the corporate earnings should also be slowing down, but still should be pretty reasonable.
There are a lot of moving parts actually. Like one of the big headlines is that we should brace ourselves for volatility when you talk about the year 2025 given of these confluence of factors that you have spoken about. But tell me now, how should one adjust their portfolio given the fact that you are going to see volatility in the market? So, which are the sectors that one should watch out for and actually look to place their bets in now?
Sumit Bhatnagar: So, insofar as sectors are concerned, we think private sector banks are very well placed, reasonable credit growth, stable NIMs, stable ROAs, and no immediate threat of NPAs spiking up. And at the same time, valuations at 1.5 to 2 times book are fairly reasonable. That is one space that we like. Then, pharma and healthcare is another space that we like. If you think of it this way, domestic demand continues to be stable, so also international demand for pharma. And with world aging, which is a reality, the demand for pharma and healthcare is only going to grow. And with opportunities like CDMO coming in, it can be a good medium to long-term story Indian pharma.
Then, another sector that we like is IT. IT, we do expect while FY24 was largely driven by your cost takeout deals and discretionary spends had dried up, we do expect discretionary spends to come back significantly in the next two years.
Second half of FY26, we should see some recovery in IT spending and FY27 should be a better year for IT per se.
Other than that, we continue to like capital goods and power and power transmission as a space, the entire value chain, where we see huge opportunity for the next five to seven years at least.
