According to Jitendra Sriram of Baroda BNP Paribas Mutual Fund sectors like energy, and relative laggards of the last 2 years such as BFSI and IT could be the relative beneficiaries of 2025.
"IT could be a clean winner of some pick up in the US discretionary spending and the weaker INR, while valuations for private banks post a period of time correction has made the risk rewards favourable at the margin," he said in an interview to Moneycontrol.
On the factors to watch for the equity market direction in the short term, he believes the Union Budget may be little bit of a non-event given the shorter time gap between the post electoral final budget of 2024 and the Budget scheduled for February 2025. "What is critical for the market is the new president taking office in the US," said the senior fund manager with 25 years of experience in the asset management.
Do you expect a significant pick-up in government capex in 2025?
If we look at the data till November 2024, the central government capital spending is up 21% for the month of November. There is definite pick up in spending from the sluggishness of 1HFY 24-25 – a fall out of the electoral code of conduct etc. This makes it down 12% for the first 8 months (April-November 2024) of the year. Sequentially, we see a pickup given the recent actions around Post Life Insurance schemes, defense acquisitions etc.
However, it is probable that the spending falls a little short of the full year target given the steep asking rate for the balance months – for the balance 4 months capex needs to rise nearly ~65% to match up to the Rs 11 lakh crore target for FY25 and we may see a shortfall vis-à-vis that target.
Which sectors are expected to be the star performers in 2025?
In our view, sectors like energy and relative laggards of the last 2 years such as BFSI and IT could be the relative beneficiaries of 2025. Downstream oils had a relatively poorer showing in the recent past on weak refining margins and fuel under-recoveries which should reverse going forward. IT could be a clean winner of some pick up in the US discretionary spending and the weaker INR. In the BFSI space, the delayed start of rate easing could be of benefit to the private banks versus the NBFC’s going forward. Valuations for private banks post a period of time correction has made the risk rewards favourable at the margin.
Do you think the market will pick up strong momentum after the key events of January 2025 and February 2025?
In our view, the Budget may be little bit of a non-event given the shorter time gap between the post electoral final budget of 2024 and the Budget scheduled for February 2025. Already the policy thrust areas are known.
What is critical is the new president taking office in the US. Given that the new president has voiced certain opinion relating to tariffs, incentivizing manufacturing within the US and restrictions on low tech jobs, it would be interesting to see the ramifications on the markets as new policy initiatives are detailed there. We would specifically be keen to watch out on tariffs as it can keep global inflation elevated for longer period of time. Hence rate easing may be a slow journey.
On the positive side MAGA – Making America Great Again, will mean that the US will need to reclaim its competitive edge in areas of manufacturing which may not go down too well with the current strength being exhibited by the US Dollar. Any weakness engineered could be positive from an EM flow perspective.
Do you foresee an interest rate cut by the RBI in the second half of 2025, rather than in the first half?
As per the current inflation trajectory of the RBI, inflation is unlikely to hit the median mandate of the MPC (Monetary Policy Committee) set at 4% by 1H of FY 24-25. Unless there are serious challenges to growth which appears unlikely, we do not see material rate easing during this phase. If monsoons are normal, in our view, rate easing would be a 2H phenomenon as inflation moves below the median mandate of the RBI.
Do you think the government will focus more on economic expansion than on boosting consumption in the Union Budget?
What you make out is a valid point. In our view, consumption is already being given an uplift by the states via the various welfare schemes targeted at women which is now across 14 states (ladki-behen, gruha-lakshmi, lado-lakshmi and various other nomenclatures across states). In our view the centre would focus itself on more capital spending towards economic expansion in areas directly under it such as defense, railways, highways, metro rail etc.
The only area where some helping hand could be offered is the urban poor wherein the government may look at certain tax reliefs in lower end of the tax pyramid.
Is the tyre sector available at attractive valuations, and should FMCG be avoided?
On FMCG, as mentioned on the prior question we think rural consumption may do better than urban on the back of the state sponsored welfare schemes. Further elevated primary inflation is usually pro-farmer (rural markets) and anti-consumers (urban markets).
When we come to tyres, we think the near term is challenging on account of elevated costs on rubber (natural and synthetic) and related chemicals (carbon black etc). However, prices of late have started to move southwards and we need to monitor these trends for sustenance. Relatedly, pick up in auto sector growth should help from a longer-term perspective.
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