“The year 2025 may begin on a cautious note due to moderation in corporate earnings growth,” Vinit Sambre, Head - Equities at DSP Mutual Fund, said in an interview to Moneycontrol.
However, according to him, companies with high-quality businesses, strong management, sustainable business models, with superior visibility of earnings growth are likely to outperform. Premium valuations may persist in segments where growth prospects remain strong.
Certain sectors like healthcare, insurance, IT, and industries linked to the power sector not only show resilience in the current environment but also align with long-term investment strategy, said Vinit with specialisation in the small and midcap space.
Which sectors are still showing strong growth prospects? Are you betting on those?
The recent economic indicators, including the latest GDP figures and credit growth, suggest a slowdown in economic momentum. This is being reflected in earnings growth across most sectors, with a noticeable moderation. The corporate sector, which experienced over 25% earnings growth in the past 2-3 years, is now transitioning to a more sustainable level of 12-13%, with FY25 projected to be even lower.
In this context, certain sectors like healthcare, insurance, IT, and industries linked to the power sector stand out. These sectors not only show resilience in the current environment but also align with our long-term investment strategy. Our portfolio decisions are guided by a focus on companies with strong competitive advantages (moats), reasonable returns on capital employed (ROCE), and the ability to outpace broader corporate earnings growth over time.
While our long-term approach prioritizes strong fundamentals, we have also allocated a significant portion of our portfolio to the aforementioned sectors. These sectors not only perform well in the current market conditions but also meet our criteria for long-term growth and stability.
Is it the right time to have exposure to the rural theme?
The rural economy is showing encouraging signs of recovery after facing challenges over the past 2-3 years. The COVID-19 pandemic significantly impacted rural incomes, and inflation further constrained spending capacity. However, income levels are gradually improving, supported by higher minimum support prices (MSPs) for crops and favourable monsoon conditions in recent years. Additionally, the rise in gold prices has provided a modest boost to rural wealth.
We remain optimistic about the rural economy's recovery and have positioned our portfolio to benefit from this trend. Our exposure includes companies in sectors such as fertilizers, agrochemicals, two-wheelers, and tractors, which are well-aligned with the needs of the rural market and poised to capitalize on the ongoing rebound.
Do you advise buying into the auto and ancillary space, as the segment saw a significant correction in Q4-CY24?
While we have exposure to the auto and auto ancillary sectors, we believe the industry may experience a period of moderation over the next quarter or two. This outlook is influenced by several factors, including slower growth in retail credit, a deceleration in job creation, and moderate salary growth. These dynamics suggest that the sector may consolidate before showing signs of recovery.
Additionally, the commercial vehicle (CV) segment has witnessed a slowdown in growth, partly due to reduced government spending in the lead-up to elections. As a result, we expect the sector to face some headwinds in the short term, with a more pronounced recovery likely to take shape once these challenges begin to ease.
What are the challenges for the US Federal Reserve and RBI in 2025? Do you expect the RBI to bring the repo rate to 6% in the coming year?
While India’s economic data has been slipping into the slow lane for quite some time, it was only after GDP growth fell below 6% that it began to be acknowledged—not in the strictest sense, but through subtle policy actions. Additionally, there is little reason not to cut rates, with inflation under control and growth slowing down. However, with the new RBI governor’s first policy meeting in February, there remains considerable ambiguity regarding the policy direction. Nonetheless, a 50 basis points cut for the full year would not be too monumental.
As for Fed, they are already on a rate cut cycle. But what remains typically concerning for the US is the level of federal debt they are running. Even if the current rate cut cycle continues, the federal interest payments will continue to remain very large, making US fiscal position more arduous. The US fiscal deficit has reached unprecedented levels post-covid, enabling other nations to boost growth without immediate consequences, which could shift if the US reduces its deficit.
As markets ultimately focus on earnings, do you see a strong earnings recovery only starting from Q4FY25 onwards? What do you expect for the December quarter?
Earnings growth momentum has been impacted by subdued government spending in H1FY25, largely due to the election-induced slowdown. While a gradual recovery is expected in government spending by Q4FY25, it may still fall short of the budgeted targets. Additionally, state capex is likely to be constrained as higher allocations are directed toward welfare programs.
On the consumption front, the outlook remains weak. As mentioned earlier, slower job creation, muted salary growth, and poor credit expansion are weighing on urban consumption, even as rural consumption shows some early signs of improvement. However, urban consumption pockets continue to moderate.
Predicting the timing of a sustained earnings recovery remains challenging. The earnings have been sequentially moderating since last 3-4 quarters and my view is that earnings could establish a low base over the next one or two quarters, setting the stage for a potential improvement thereafter.
Where should the government focus in the Union Budget 2025?
Budget is an exercise in accounting. The union government has repeatedly shown that policy making can happen outside of the budget. Hence we don’t carry any significant expectations. The best outcome would be continuity in policy making through steady capex spend and probably no significant changes in tax rates.
What is your learning from the equity markets in 2024? Do you see similar kind of environment and returns in 2025?
The year 2024 was another strong one for equity performance. A major takeaway for me has been that despite high starting valuations, equities can deliver robust returns when growth potential and valuation metrics are balanced effectively. However, the midyear correction served as a reminder that valuation exuberance inevitably realigns with fundamentals.
As we look toward 2025, the year may begin on a cautious note due to moderation in corporate earnings growth. However, companies with high-quality businesses, strong management, sustainable business models, with superior visibility of earnings growth are likely to outperform. Premium valuations may persist in segments where growth prospects remain strong.
Emerging themes such as renewable energy, artificial intelligence, quick commerce, and electric vehicles are shaping new growth vectors. We see a few companies tapping opportunities within these sectors emerging as long-term winners, presenting exciting opportunities for investors.
A word of caution is warranted for the new investors who have largely experienced bull markets. Navigating weaker market conditions will test their resilience. Keeping a long-term perspective and moderating return expectations for the next year or so will be critical.
Overall, 2025 calls for a balanced approach—leveraging growth opportunities while staying grounded in fundamentals and realistic expectations.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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