As markets usher in a new year, analysts at Kotak Institutional Equities predict a soft start to 2025, driven by lingering concerns over elevated valuations, weak consumption trends, potential US policy shifts, and geopolitical tensions. This suggests that the lackluster market trend observed in the second half of 2024 may persist into early 2025.
For context, 2024 was a year of two halves: solid gains in H1 were followed by stagnation in H2, with benchmark indices delivering no returns. "We expect the early part of 2025 to mirror H2 of 2024, with the Indian market likely to remain directionless until clarity emerges on key issues," KIE stated.
The brokerage also flagged a several headwinds—both global and domestic—that are expected to keep market sentiment uncertain in the coming months.
Domestic headwinds
Kotak Institutional Equities identifies three key domestic headwinds likely to weigh on markets in the short term: elevated valuations across most sectors and market caps (except financials), earnings downgrades, and sluggish consumption demand. While valuations for headline indices have moderated, they remain stretched in many segments, the firm noted.
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Adding to the uncertainty are speculations around the government’s policy stance ahead of the upcoming Union Budget. Concerns over a possible shift toward populist measures to appease coalition partners have kept investors cautious. These factors are expected not only to dampen returns in early 2025 but also to heighten market volatility.
KIE notes that greater clarity on the government’s long-term fiscal approach may only be known after the forthcoming 2026 budget on February 1, making it a pivotal event for market sentiment.
Global uncertainty
Aside from domestic headwinds, global uncertainties also loom large. The incoming Trump administration, set to assume office this month, brings with it speculation about potential policy shifts that could significantly influence the global economy and markets. Therefore, KIE, believes that the domestic and global policies of the incoming US administration will have a large bearing on the global economy and markets.
Aside from that, the continued escalation of geopolitical conflicts in several parts of the world continue to keep investors jittery. While India remains relatively insulated from these challenges, the brokerage notes that global sentiment will still play a crucial role in shaping the direction of Indian markets.
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