Daily Voice: Ladderup's Raghvendra Nath doesn't foresee any major policy announcements in budget that would significantly sway equity market sentiment

Do you believe the bond market will outperform equities in 2025?

The future is inherently unpredictable. Predicting the direction of interest rates and Equities is obviously fraught with risk.

The way things stand right now, there is a good probability that we may see a reversal in the rate cycle. Inflation has been within the comfort range for many quarters now, and the growth expectations are normal. The government would like to bolster growth further and for that cost of credit could be a good catalyst. Any rate cuts shall benefit the long-dated bonds immediately.

On the other hand, we have ended the year with a multi-year bull market. The markets are still showing very high resilience, and investor participation continues to remain high. But during the last three years, we have seen a consistent improvement in valuations. While stock-specific movements will drive the markets in 2025 at a broader index level the growth may be much more moderate in 2025 in comparison to what we have seen in the last two years.

So there is a bright possibility that bonds may end up outperforming Equities in 2025.

Do you anticipate any major announcements in the Budget 2025 that could significantly impact equity market sentiment?

Given the current political stability, I anticipate that the Budget 2025 will largely reflect the government's ongoing commitment to fiscal prudence, which they have emphasized in recent years. This presents a great opportunity for the government to make strides toward achieving its targeted fiscal deficit.

I expect to see continued investment in infrastructure, with a stronger focus on areas like housing, electricity, and employment generation, rather than significant tax cuts or major incentives. Historically, markets have built up very high expectations around the budget, which has often led to negative reactions afterward. In my view, while the budget will be beneficial for the overall economy, I don’t foresee any major policy announcements that would significantly sway equity market sentiment.

Do you foresee major risk factors in the NBFC sector that might affect earnings growth?

NBFCs have experienced rapid growth over the past couple of years, but I do anticipate that we might see some moderation in certain segments, particularly in unsecured personal lending and among NBFCs operating in the microfinance sector. This is largely due to the cautious stance taken by the RBI, as evidenced by the increased risk weights on unsecured personal loans, along with the high delinquency rates we've seen in the microfinance space over the last few quarters and the elevated household debt-to-GDP ratio.

That said, I don’t believe there are any major systemic risks within the sector as a whole. The larger, listed players are well-established, adequately capitalized, and have solid growth drivers in place.

Do you expect economic growth to slow down further in the second half of FY25?

I believe the likelihood of economic growth slowing down further in the second half of FY25 is quite low. The subdued growth we observed in the first half was primarily influenced by reduced government spending, which is typical during election periods. Additionally, several significant headwinds that previously hindered growth—such as the slowdown in retail lending, the impact of an intense heatwave, and the various elections across key states—are no longer relevant.

Looking ahead, we anticipate a rebound in government expenditure and an increase in rural demand, which should positively influence growth in the latter half of the fiscal year. Furthermore, if the Reserve Bank of India initiates a rate-cut cycle, it would provide additional support to our growth projections. Overall, we are optimistic that the growth figures for H2 will surpass those of H1.

Which investment themes should be included in a portfolio for 2025?

As we look ahead to 2025, it appears that the continuation of the broader equity market rally we have witnessed over the past 18 to 24 months is less likely. We are entering a phase that favours stock selection, and I believe that quality and growth-oriented stocks will outperform in the coming 1 to 2 years.

That said, I do not expect serious investors to be deterred by the volatility we have experienced over the last three months. In fact, many view this volatility as an opportunity to acquire stocks at more favourable prices as corrections occur. Overall, Indian equities continue to represent a compelling long-term investment, supported by the country's robust structural growth story.

Do you anticipate better earnings growth in Q3 FY25 compared to Q2 FY25?

I anticipate that earnings for Q3 FY25 will show improvement compared to Q2 FY25, driven by several favourable factors. The festive season, increased government spending, recovering consumer demand, and the wedding season all contribute to a positive outlook for this quarter.

However, it will be important to assess how these earnings compare to those from Q3 FY24. Sectors such as hospitality and jewellery, real estate (premiumization theme) are expected to perform well, continuing the trend of strong earnings growth. Additionally, the recent auto sales figures for December also indicate a promising Q3 for OEMs.

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