It was a sea of red on Dalal Street on Thursday as stocks were hammered following the US Federal Reserve's hawkish commentary on interest rates.
The BSE Sensex tumbled 964 points or 1.20 per cent to close at 79,218.05. Similarly, the NSE Nifty 50 index ended 247 points or 1 per cent lower at 23,951.70 points.
The US Fed on Wednesday expectedly cut interest rate by 25 basis points. However, it signalled interest rate cuts next year could be fewer than expected. This led to the massive sell-off amid concerns of more foreign fund outflows from domestic bourses.
Foreign portfolio investors sold over Rs 1.15 lakh crore in Indian equity over October and November. While they had been reinvesting in the first couple of weeks of December, there has been a massive selling again in recent days amid the Fed uncertainty.
Continued investing by domestic investors has cushioned some of the FII sell-off. Still benchmark indices are down around 8 percent from their peak.
Despite, this recent correction over the last couple of months, equities largely outperformed other asset classes in 2024. However, as we approach 2025, investors may have to lower their expectations, with returns likely to be flattish, warn market experts.
Dhiraj Relli, the MD and CEO of HDFC Securities pointed out that there hadn't been any major correction in the market in the last two years and a big concern now was that world markets as well as domestic markets were fully valued at these levels.
"My take is that equity will still continue to outperform other asset classes in India as well as globally. But we have to moderate our return expectations from equities because we are approaching it with the full valuations and also some uncertainties due to some policy action from the largest economy in the world," he said.
The broking firm noted that the Nifty index was trading at 23 times FY2025 and 20.5 times FY2026 consensus earnings expectations, indicating "modest upside potential" in the next 12 months.
Uncertainty around US President-elect Donald Trump's tariff-related policies as well as his stance on geopolitical issues could weigh on the stock markets globally, he felt. That could also lead to some volatility in the markets in the first couple of quarters next year, he added.
Apart from global trade and geopolitical uncertainties, domestic investors have also been worried over the lacklustre corporate earnings in the September quarter.
Relli believes Indian markets will become more attractive when we start to see better earnings in the 2025-26 financial year. That is when participation from FPIs will also increase, he felt.
Domestically there are also concerns among investors over the slowdown in the GDP growth in the July-September quarter.
One reason behind the slowdown was the election-related slowdown in government capital expenditure. While it is expected to pick up in the second half of the current financial year ending March 2025, the government may not be able to meet the full-year target, feel analysts.
HDFC Securities expects India's GDP to grow 6.4 per cent in 2024-25 with downside risks given a slowdown in urban demand and a lack of substantial revival in private investments. Growing rural demand and an anticipated pickup on government capex will be the growth levers.
Next year (2025-26), the broking firm expects GDP to grow 6.7 per cent.
The Reserve Bank is expected to start reducing the repo rate from February, with a 25 bps cut, provided retail inflation remains in the comfortable zone (below 6 per cent) and there is no further depreciation pressure on the rupee, analysts said.
"Indian economy growth will be led by investments and rural consumption in 2025, indicating growth in industrial manufacturing, real estate, allied segments and rural economy facing sectors," according to HDFC Securities.
Its preferred sectors currently are large banks, top-tier IT companies, consumer durables, capital goods real estate, cement and building materials.
It remains underweight on automobiles, consumer staples, oil and gas, midcap IT companies, small banks and non-banking finance firms.
