market: ETMarkets Smart Talk: Sunrise sectors to watch – Renewable Energy, EVs, and Quick Commerce in 2025, says Niraj Kumar

Indian market started the new year on a shaky note. How do you see markets in the year 2025?

Year 2025 is going to be an eventful one for global and domestic markets, as they embrace the new challenges of the world.

With the US president Donald Trump at the helm, we believe his future course of policy actions is likely to set the rhetoric for markets in 2025.

With global central banks having embarked upon the rate cut cycle in 2024, year 2025 is likely to see shallower easing cycle than anticipated, thanks to the tricky last mile of disinflation, coupled with unknown impact of impending tariffs and policies by Trump on Inflation.Also, with strong labour market holding up, the ‘higher for longer’ narrative now seems to be the base case.
While 2025 has kickstarted on a jittery note and the path ahead is likely to be a volatile and challenging one, we reckon Indian economy and markets are likely to be less impacted vis-à-vis its global counterparts, given its domestic backdrop of macro recovery and resilience.
Albeit India’s economic growth has seen some slow down across many pockets in recent months and has impacted the corporate profits, leading to some earnings downgrade, the long-term structural growth story remains intact.
With Inflation on cruise control, improving economic growth aided by government capex and rural recovery, relatively contained current account deficit, a weaker but relatively outperforming INR & strong corporate balance sheets, all point to better macros in an uncertain world.

Overall, in 2025 we expect volatility in global markets led by trump led policy actions and ongoing geopolitical tensions to have some bearing on Indian markets leading to some consolidation in the interim.

But as testified in the past, Indian markets have exemplified resilience and that any such points of correction are deemed as an opportunity to build a constructive portfolio in Indian markets.

How do you see the insurance sector in 2025?
Life Insurance as a sector has gained paramount importance in the last few years especially after covid and given the government’s target of Insurance for all by 2047, it will continue to be the growth focal point for the government in 2025 and beyond.

The Insurance sector in CY2024 has demonstrated reasonable growth driven by traction in linked products, while there has been some pressure on margins and the sector was posed with some changing product regulations.

With an increased focus on customer-centricity, operational efficiency, & regulatory compliance, the industry is well aligned and on track to achieve the governments vision of ‘Insurance for All’.

With insurance co.’s making ongoing technological advancements, enhancing their distribution models, & aligning with the government’s long-term vision, the sector is rightly laying the cornerstone for a more inclusive and secure financial safety net for the people.

Besides given that the insurance penetration remains very low in India, the scope for growth is immense.

While the sector’s structural growth story is intact, there may be some regulatory overhangs in the interim in the form of upcoming budget, potential introduction of the Insurance Amendment Bill, likely GST exemption and caps on bancassurance, which could lead to volatility in the near term.

However, we continue to be positive on the sector as these regulatory changes will augur well from long term growth standpoint, while posing some hiccups in the interim.

Any sunrise sector which investors can keep on their radar?
Prima Facie, India’s sunrise sectors such as Renewable Energy, Electric Vehicles (EV’s) and Quick commerce present an attractive investment proposition from a long term standpoint given the supportive policy push by the government and its favorable impact on India’s Economic growth.

Particularly, Quick commerce is one space that we like as it provides unparalleled convenience to the consumers and has given a new dimension to consumption in India.

We believe it would serve as a key catalyst and give the requisite fillip to India’s consumption led growth. It would facilitate growth and foster innovation in Indian B2B and B2C players, contributing to the overall GDP growth.

Renewable Energy is another space which can lure investors as the sector has a lot of option value and is witnessing unprecedented growth largely driven by the government’s resolve to achieve 500 GW of non-fossil fuel-based energy by 2030.

What are your expectations from India Inc. for the December 2024 quarter?
Against the backdrop of slowdown in consumption (esp. urban), lagging pace of government capex, and macro prudential measures by the regulator towards unsecured credit leading to credit growth easing from a robust 15% to a 11-12%, Indian incorporation is unlikely to deliver fireworks in the Dec 2024 quarter.

We expect a modest earnings growth of mid-high single digit with BFSI expected to drive the earnings growth along with sectors such as Capital Goods, IT, and Healthcare; while global cyclicals such as commodities will continue to drag the earnings and Auto and consumers are likely to post a flattish performance.

Earnings slowdown in this quarter is more of a consensus call now and hence any positive surprise is likely to be rewarded. Going forward we expect earnings growth to pick up in Q4 with government capex already picking up and recovery in consumption.

I was reading a report recently and it said that large caps have a lot to catch up on as the ownership of small & midcap increased. What are your views? How should one play the small & midcap theme in 2025?
Interestingly, CY2024 has seen large caps underperforming with NIFTY large cap generating 9% returns while small and mid-cap have outperformed by 15% each.

This is indeed intriguing as small- and mid-cap stocks posted a sharper recovery (that too on a high base) than their large-cap counterparts, despite the latter’s seemingly attractive valuations.

With Nifty-50 trading at ~20x one-year forward earnings, while the mid- and small-caps trading at premium to their historical averages, clearly large cap space seems more lucrative.

Going forward, while we continue to see comfort in large caps as the valuations are reasonable and there is a margin of safety, we also see some pockets in small and mid-cap stocks where the froth has fizzled out and are presenting some good buying opportunities.

With small and mid-cap space seeing some sharp correction recently, one should have a bottom-up approach and try and identify pockets where there is a structural play with strong fundamentals and valuations are becoming reasonable.

How do you see the FII money flowing in? In 2024 we saw FIIs putting money in primary markets. Do you see a similar trend in 2025 amid retraction by central banks across the world?
In 2024, FII flows into Indian equities have been oscillating between extreme outflows and inflows After a subdued start with net outflows in the preceding months of general elections, the flows turned positive post-election, resulting in strong inflows over the next 4 months.

However, October and November witnessed a sharp reversal, thanks to the sharp global risk-off sentiment which was a culmination of US election verdict and strengthening of dollar following Fed rate cuts.

Trump’s pro- business agenda and promise of tax cuts bodes well for US growth and has indeed fueled the euphoria in US equity markets. Consequently, the expectation of rising growth differential between US and Rest of the World is indeed luring foreign flows into US out from EM’s and resulting in strengthening of dollar and adding to pressure on EM currencies including the INR.

Notably the outflows seen from India has been majorly driven by EM outflows rather than selling in India dedicated funds. In India’s context, the key silver lining for Indian markets has been the relentless domestic investors support who have been steadfast and exemplified the unwavering support to markets.

Going forward, while the specter of tariff wars, a rising dollar and hawkish outlook for Fed cuts is likely to keep the FII flows subdued at the margin, India’s long term structural growth story would eventually lure the FII flows back into India.

Besides the restrictions on China by the US could also redirect FII flows to India, especially after a massive outflow seen in the recent past. We expect dollar and yield will peak out soon as clarity emerges on actual delivery of Trump’s promises.

Any undershooting of the delivery versus the promises may lead to sharp reversal in the fund flows. Furthermore, with valuations having corrected sharply, we will see FIIs sell off intensity will also reduce.

What is your current cash position? Are you fully invested, or have you recently increased your deployment significantly?
We fall in the camp of portfolio managers who believe in partaking gradually at every market dip. While no one can really time the markets, one can leverage on the opportunity that markets offer in every fall.

With markets having corrected in the last few months, we have been deploying cash and have been rebalancing the portfolio to reallocate a bit from defensive to domestic growth stories where valuations have corrected.

As we know markets are likely to remain volatile in the run up to key events of 2025 viz, Trump swearing in as the president, Union Budget, RBI policy etc, we would get a lot of opportunity to build quality equity portfolios.

Any sector(s) which long term investors can look to pare their positions amid the recent rise?
IT is one sector where we think investors can pare their positions- Even as the growth is expected to pick up, cross currency headwinds will impact margins.

Valuations building in the best-case outcome. Stocks have outperformed due to the US growth narrative under Trump 2 and are likely pricing in the positives.

We also recommend reducing exposure to EMS space where despite a very strong growth runway, valuations are expensive.

Likewise, is the case with Solar space wherein large capacities are coming up and hence there is likely to be pressure on realizations/margins going forward.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)