Daily Voice: Highly unlikely that Nifty would deliver double-digit returns in 2025, says Ambit's Nitin Bhasin

United States is about to go through a change in Presidency. Donald Trump has already made promises such as cutting corporate tax rates, providing incentives to manufacturers and even impose greater tariffs on imports from China, Canada, Mexico, etc. These policies are inflationary in nature and may be introduced during a time when US labour markets and consumer spending remain resilient. Inflation too remained 2.7% YoY in November 2024, higher than the targeted 2%. In such a situation, Fed would like to wait & watch before committing to full-fledged rate cut cycle.

What will the Reserve Bank of India’s path look like in terms of rate cuts in 2025, following the Fed's stance in the December meeting?

In our opinion, India’s final stages of disinflation is taking longer than what was initially expected as food prices remain sticky at elevated levels (7.6% in 8MFY25). MPC’s (Monetary Policy Committee) own estimates suggests CPI inflation is top touch target 4% only in Q2FY26 as food prices are set to keep near term inflation elevated. Keeping uncertainties related to food inflation in mind, we don’t expect more than 50bps rate cut in CY25.

Is the rural theme looking attractive for buying now?

The macro data remains weak but few ideas can be looked from bottom-up perspective. It’s a stock picker’s market. Rural real wage has continued to contract in FY25YTD (1.1% YoY). Although indicators like FMCG volume has shown growth, it should be noted that it has been achieved on back of price cuts and lower base. PLFS (Periodic Labour Force Survey) data also showed rise in share of agricultural work force, indicating continued stress in higher paying non – farm labour market.

The only bright spot has been agriculture sector, which has seen higher sowings due to favourable rainfall. Rural 2-wheeler and passenger vehicle sales are growing faster in rural than the urban market. On the back of good monsoon lifting market sentiments and the festive season, tractor sales data also remains robust. So, these plays can be looked at!

Do you believe that 2025 may not be easy-going for equity markets to achieve 10-15% gains?

We expect normalization in Nifty returns as market drivers i.e., earnings growth, earnings revision, valuation, interest rates and sentiment reflected in RBI Surveys doesn’t inspire confidence. It is highly unlikely that Nifty would deliver double-digit returns in 2025.

Over FY21-24, Nifty earnings estimates were sustainable but in FY25, Nifty earnings estimates have been cut by 4.3% since March 2024. A disappointing Q3FY25 reporting season can accelerate downgrades further. Proportion of companies delivering negative earnings surprises in NSE500 universe, was the highest in last quarter since June 2021. Additionally, large pockets of market continue to trade within 5% premium of all-time high (ATH) valuations.

Lastly, the prevailing optimism is beginning to fade. Current industrial outlook declined led by moderation in demand conditions and household expectation of inflation remains elevated. With earnings growth slowing down, negative earnings surprises accelerating, expensive valuations and worsening sentiments, we believe caution should be exercised. Time to be selective, as CY25 is expected to be a stock-picker’s market with significant divergence in median and index returns! We expect polarization to increase in CY25 that has been associated with weak market returns over the last two decades.

Which sectors are compelling buys right now for 2025?

Across equity cohorts, valuations are expensive whereas earnings growth has slowed down! In relative preference order, we like banks and IT. Banks sector stands out on our sectoral framework, which looks at Market Capitalization (Mcap) contribution in conjunction with profit contribution of a sector to broader universe (NSE500). The profit contribution of Banks to the NSE500 profit pool is ~26%, while Mcap contribution is only 12%. Our analysis suggests that profit contribution will be sustainable in FY25 and it is not going to taper off.

FY25 is expected to be a year of earnings growth normalization and Banks are at a confluence of reasonable valuations and decent earnings growth. As such, the ATH divergence between Mcap and profit contribution should narrow down. Additionally, never in the last 2 decades, when Bank Nifty/Nifty ratio slipped to -2 Z-score, have Banks underperformed the following year.

Apart from BFSI, quality factor is expected to outperform in near to medium term. Over the past 5 months, quality and low volatility performed better compared to other factors. With EPS growth expected to normalize in FY25, we expect quality to outperform, a trend that has just begun. Evidence from US suggests that Quality factor outperformance has been associated with the event of slowdown in earnings growth. Dissection of the NSE200 Quality index reveals that IT comprises of the 2nd highest weight in the factor.

Lastly, 12m forward. IT returns have been positive in most instances post 1st Fed rate-cut. With BFSI & IT being primary drivers of Nifty earnings growth in Q2FY25 and FY25E, we expect IT to outperform as well in the near-to-medium term.

Which sectors are expected to drive earnings growth in the December quarter?

BFSI and IT were the primary drivers of Nifty earnings growth in Q2FY25 & we expect this to continue in the December quarter. Moreover, BFSI and IT are forecasted to contribute ~60% of incremental Nifty FY25 EPS growth. Apart from these, telecom is expected to witness substantial earnings growth due to tariff hike of ~15% undertaken across the sector in July’24. Usually, earnings improvement comes with a lag of about 1-2 quarters.

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