Daily Voice: This expert sees growth in 4 sectors for 2025 despite high valuations, 10% Nifty returns

Key challenges are elevated valuations in countries such as India, the US, Taiwan, and Japan, which could constrain upside potential. US Federal Reserve Tapering is strengthening the USD, and financial liquidity is diminishing in emerging markets. Additionally, the Indian rural financing sector is in a disarray, and the domestic economy and earnings growth are facing a short-term deceleration. The unknown risk is Trump tariff threats, which has to be watched.

We forecast a 10% return for the Nifty50 index, given the balanced environment generated by the stable world and domestic economy in 2025-26. The headwinds of 2024 like geopolitical risk, interest rates, and hyperinflation are correcting, supporting the culture of equity.

Do you think the market is underestimating the growth potential of electric vehicles in India?

The market might indeed be underestimating the growth potential of electric vehicles (EVs) in India. As per the Niti Aayog report the overall EV adoption rates are expected to reach 10-12% of annual sales by FY26 and 30-35% by FY30, which is substantially higher compared to the current 5-6% of the annual sales. Moreover, significant investments being made by the Original Equipment Manufacturers (OEMs) in this space are aligned with the given outlook.

However, concerns of high upfront cost, proper infrastructure and determining the residual value (depreciated value after years of usage) has brought pessimism in the EV mass adoption. We expect government incentives and technological advancement in new models by the larger OEMs will improve the sentiments going forward.

Are you super bullish on the energy transition theme? Should it be included in one's portfolio?

India is making significant strides in the energy transition process, aiming for 500 GW of non-fossil electricity capacity by 2030 from the current installed capacity of 201 GW. Various government initiatives and public-private collaborations support the transition with incentives for all the stakeholders across the value chain. However, the theme’s key risks include regulatory uncertainty, land acquisition challenges, deficient transmission infrastructure, and grid stability issues.

Nevertheless, it remains attractive for long-term investors to invest with a diversified approach on the overall power sector across renewables, energy storage, equipment manufacturers, EPC and grid infrastructure.

Do you expect all MPC members to vote for an interest rate cut only in April, and not in February 2025? Is the MPC concerned about the expected actions of the Trump administration?

Well, whether the new MPC will delay the interest rate cut decision is a premature call to take now as it will depend on the upcoming domestic inflation data and policies of world central banks like US Federal Reserve and European Central Bank. However, we believe that the rate cut chances for India have improved for 2025. This is due to a moderation in global inflation and forecast of domestic inflation to reduce in 2025 led by a drop in food inflation, while there were no rate cuts by the MPC in 2023 and 2024.

Regarding the Trump administration's impact, the emphasis is more on the world market and the Fed’s concerns rather than the MPC. This is especially important because the Fed policy has shifted from accommodative in September to neutral in December.

Are you cautious about the consumer sector?

In FY24, the consumer sector was adversely hit by weak weather, increasing food inflation and reducing disposable income. Pent-up demand has also reduced over the years. Urban demand was the most hit due to lower wage growth, election-related slowdown in government expenditure, and disruption in traditional channel from the shift to quick commerce. Going forward, record-high Kharif production and favourable post-monsoon climate for Rabi season are expected to boost rural demand and reduce food inflation.

While accelerated government capex spending in H2FY25 will improve urban demand. We have cautiously positive expectations for Q3FY25 while better improvements are anticipated from Q4FY25 onwards. The sector's valuation has corrected from premium to +1SD (standard deviation), which is expected to sustain due to improvement in 2025 outlook.

Which sectors are expected to record healthy growth in 2025?

Sectors like chemicals, defence, renewables and electronics manufacturing services are poised for significant growth despite high valuations, led by scalability in business. Private large banks and infra also offer growth potential due to stable asset quality, fair valuations, and government spending. The FMCG is forecast to benefit from favourable weather conditions, rural and urban demand, and fair valuation. While the textiles sector is expected to benefit from a rise in geopolitical uncertainty, a drop in input prices, and the China Plus One strategy. IT and Pharma can do well led by stable demand and USD appreciation.

Do you see a better risk-reward ratio in large caps compared to mid-caps in the IT sector right now?

Yes, currently, large-cap IT stocks are generally seen as having a better risk-reward ratio compared to mid-caps offering more stability and resilience. However, on a long-term basis mid-caps stocks are also offering visibility driven by scalability owing to improvement in hiring for newer technologies, making it currently a stock specific call. But low discretionary spending by the developed market amid global slowdown and inflationary pressure, in the near term, may result in volatility in the mid-cap space.

Despite the current low IT spending, the large-cap players were able to offset near-term headwinds by the strong fundamentals, deal wins, depreciation of INR against USD, AI opportunities and the ability to offer regular dividends.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.