For investors, 2024 was kind of unique year as equity as well as gold delivered strong returns. However, since their peak in September, equity markets have been in a correction phase amid geopolitical uncertainties and a massive sell-off by foreign institutional investors. With market volatility expected to continue for some time, analysts have been advising caution and a more balanced approach to investing, rather than going all out on equities.
Since hitting their life high in towards the end of September 2024, the BSE Sensex is down around 11 per cent and the broader NSE Nifty 50 has declined 12 per cent. The benchmark indices closed in the green for the second straight day on Wednesday, but they are still down around 2 per cent in the first 15 days of 2025.
The past few years—post the Covid crash in March 2020—have been extremely rewarding for equity investors. However, according to Ashish Shanker, the MD and CEO of Motilal Oswal Private Wealth, Indian markets are likely to remain volatile and uncertainty is likely to prevail in the first half of 2025 due to various events, including the policies of the new Donald Trump administration, China's measures to counter trade tariffs and its possible implications for emerging market currencies and the upcoming Union Budget.
"The year 2025 will bring its share of uncertainty as the new US president gets sworn in. After years of good performance, the US markets also look tired. This calls for moderation in expectations and a sharp focus on risk management through asset allocation," said Shanker.
Corporate earnings in the July-September quarter had been "tepid" and GDP growth too had slowed, and how things pan out on the growth as well as the ongoing corporate earnings season will have to be closely monitored, says Motilal Oswal Private Wealth. In 2024, mid and smallcaps outperformed large caps, but this trend is expected to reverse this year, with large caps likely to do better as they offer more valuation comfort, it added.
"Small cap stocks have run up way ahead of earnings growth in most of the segments," it said.
Earlier this week, S. Naren, the chief investment officer of ICICI Prudential AMC, too had said mid and smallcaps were overvalued and that the fund house was favouring mega and large caps.
The wealth management firm is still positive on the medium term outlook for Indian equities, given India's stable macroeconomic environment characterised by controlled fiscal and current account deficits, likely increase in government spending, monetary stimulus by the Reserve Bank and expectations of strong earnings growth in financial years 2026 and 2027, despite flat growth expected in the current financial year. Continued growth in domestic investments, primarily channeled through mutual funds, is also mitigating the impact of FII outflows, it pointed out.
In this backdrop, how should an investor's portfolio strategy be right now?
"Considering the recent corrections, if equity allocation is lower than desired levels, investors can increase their allocation by implementing a lump-sum investment strategy for a hybrid equity-oriented fund and a staggered approach over the next six months for pure equity-oriented strategies, with accelerated deployment in the event of a meaningful correction," it said.
While equity markets are likely to be volatile and uncertain, Motilal Oswal Private Wealth remains positive on gold. One reason is the share of the US dollar in global reserve currencies has been falling. Amid rising geopolitical uncertainties, global central banks continuing to purchase gold will drive demand for the precious metal. Besides, the rupee depreciation against the dollar will make gold more expensive in the rupee terms and thus support prices too.