2025 will be a phase of market consolidation, says Aditya Birla Sun Life AMC's Harish Krishnan

2025 will be a phase of market consolidation, says Aditya Birla Sun Life AMC's Harish Krishnan

The year 2025, according to a top Aditya Birla Sun Life AMC executive, is poised to be one of macroeconomic turbulence with significant policy shifts and global trade uncertainties.

For the domestic markets, Harish Krishnan, Co-Chief Investment Officer, believes it will be a year of consolidation.  “We anticipate a phase of consolidation in 2025, with fewer stocks participating in market gains, necessitating a more selective investment approach,” he added.

Krishnan was speaking as part of Aditya Birla Sun Life AMC's Market Outlook 2025.

Krishnan noted that while liquidity has been a major driver of recent market performance, earnings ultimately determine stock prices. Therefore, he said, “the current disconnect between earnings and valuations suggests a need for consolidation.”

The management also spoke about sectors where they see opportunities and risks going ahead.

Here are some of the key highlights:

Top-line growth to be a primary driver for earnings: While earnings rebounded sharply in the past decade, they have recently declined as a percentage of overall GDP. However, profits as a percentage of GDP have surged to near their 2007-08 highs, driven by factors such as the shift from unorganised to organised sectors. In 2025, they anticipate top-line growth to be the primary driver of earnings growth, with overall profit growth likely to converge towards the 12 percent mark.

Changing market dynamics:  While FPI inflows have been modest post-COVID, resulting in light FPI positioning, we believe a large portion of FPI selling is behind us, as their current weights in Indian equities are at historically low levels, said the fund house. The domestic market was fuelled by strong SIP flows and robust direct investments from Indian households. This increased domestic demand has contributed to asset inflation (rising multiples) and opportunistic selling by some long-term investors. The significant inclination of retail investors towards F&O trading, despite the inherent risks, has also played a role in shaping market dynamics.

Additionally, at the start of the year, elevated valuations led to expectations of a deterioration in market breadth and a polarisation of returns. However, valuations have moderated somewhat recently.

Stocks in focus: For 2025, the fund house expects to see a phase of consolidation, with fewer stocks participating in market gains, necessitating a more selective investment approach.  Sectoral analysis within the BSE 100 suggests strong growth prospects for sectors like cyclicals, benefiting from global trends and base effects, and consumer discretionary. We believe the next doubling of earnings is likely to occur within a 5 to 6 years’ timeframe, aligning with historical trends, it said.

They see opportunities across segments such as private banks, metals, cement and IT.

Private Banks: Following a period of significant profit growth that drove their profit pool share to a 25-year high of 1% of GDP, leading to market derating, the strategy anticipates a normalisation of profitability and potential multiple expansion.

Metals: With the sector's profit pool share falling to 2001 levels and ownership at a historic low, despite recent underperformance, the strategy views metals as a potential contrarian play, particularly given the strong balance sheets of metal companies.

IT: While the IT sector's profit pool share has declined from a peak during COVID, the strategy maintains a positive outlook, anticipating margin improvement driven by offshoring and continued strong demand from the US.

Capex growth in 2025:

According to Krishnan, there is an emergence of a two-tiered capital expenditure cycle. “While most companies are still cautious and investing conservatively, a group of 170 large conglomerates are significantly increasing their capital expenditure, investing more than their combined profits,” he added. This proactive investment by conglomerates, coupled with the belief in India's long-term growth story, presents a compelling investment opportunity, according to him.

With credit growth normalising, net interest margins declining, and credit costs rising, particularly in microfinance and unsecured lending, Krishnan anticipates a normalisation of profitability. This, coupled with a significant market derating (from 15-16x forward P/E to 10-11-12x), suggests a potential for multiple expansion towards 16-17x forward P/E, even with potential earnings contraction. Furthermore, ownership by actively managed mutual funds has declined to 2014 levels, and recent sector returns have been muted, further

“There is a potential that India's rating can get upgraded over the course of the next 12 months, and that could be a key catalyst that can come through,” concluded Krishnan.