After a stellar year of returns, equity market investors may have to temper their expectations in Samvat 2081- The Week

BSE Sensex and NSE Nifty 50 ended on a disappointing note on Thursday, with the benchmark indices declining around 0.6 per cent, capping a month of losses amid relentless selling by foreign institutional investors.

Yet, Samvat 2080, which began on November 12, 2023, proved to be among the best years for the stock market in the past three years, with the Sensex gaining 21 per cent and the Nifty 50 rising 24 per cent. Strong economic growth, record buying by domestic investors, especially through mutual funds, and good earnings growth in select sectors powered the markets ahead last year, even as the escalation in geopolitical tensions and global economic uncertainty weighed.

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Another key thing to note about Samvat 2080 was that the rally was broad-based, with the midcap and smallcap index outperforming the large caps by a wide margin. The BSE Midcap index, for instance, accelerated 40 per cent over the year, while the BSE Smallcap index surged 41 per cent. Similarly, the NSE Nifty Midcap100 rallied 37 per cent and the Smallcap100 rose 38 per cent.

However, there has been massive selling by FIIs through October, as tensions between Israel and its neighbours have escalated, the US Federal Reserve and other major central banks have slashed interest rates, and China too has aggressively announced stimulus measures to give its stumbling economy a lift. China’s stimulus measures have rallied the markets there recently.

According to data from Trendlyne, FIIs sold Rs 1.14 lakh crore in the stock market in the past 30 days. The record selling was, to an extent, offset by continued strong buying by domestic investors. DIIs purchased Rs 1.07 lakh crore equity in the same period. Still, the headline Sensex and Nifty are down around 8 per cent from their life high.

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Looking ahead into Samvat 2081, there are various headwinds markets are facing. While geopolitical uncertainty continues domestically, signs of a slowdown are emerging. Leading fast-moving consumer goods (FMCG) companies have, in recent weeks, pointed to a slowdown in urban markets, even as rural markets are gradually recovering. Passenger vehicle sales slowed ahead of the festive period, driving inventories up sharply.

With valuations in certain pockets still looking expensive and with consumption showing signs of a slowdown, even if in the near-term, market experts say investors may have to temper down their expectations this year from the equity market and not get swayed by the strong returns they have seen last couple of years.

“We expect returns across debt, equity and gold to converge to a narrow range. Investors will have to moderate return expectations significantly,” said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company.

Globally, the Federal Reserve and other major central banks are expected to continue to lower their interest rates. Who wins the presidential elections in the US also remains uncertain, as of now. Will the Chinese stimulus measures work, and how the economy pans out there will also be closely watched.

Back home, the Reserve Bank of India, in its latest monetary policy committee meeting, changed its stance to neutral, even as it left its benchmark Repo Rate unchanged at 6.50 per cent for the tenth time. Many economists have said there is only likely to be a shallow rate cycle by the RBI, around 50-75 basis points only. But whether it will begin to cut rates in December is still not sure, given food inflation remains a concern.

Amid all this, corporate earnings delivery will be a critical point that could drive markets, say experts.

“While the long-term growth story for Indian equities remains stronger than ever, current valuations leave limited room for expansion. This means that growth in corporate earnings will be a pivotal driver of market returns,” said Pranav Haridasan, MD and CEO of Axis Securities.

Seshadri Sen, head of research and strategist at Emkay Global Financial Services, sees extreme volatility ahead and sees equities time-correcting through the second half of the current financial year ending March 2025.

“The 8 per cent Nifty correction in October 2024 is accompanied by widespread earnings downgrades, and we see no case to jump in just yet. The silver lining is that earnings growth should recover in the second half, given the one-offs in the first half of FY25 and an expected government capex recovery,” he said.

Sen pointed out that almost half of the Nifty companies have faced earnings per share (EPS) cuts of more than 1 per cent in October.

“The widespread consumption slowdown is the key worry—lumpy bank provisions have also contributed, but that is a transient factor,” he noted. He added that while their September 2025 target of 26,000 for Nifty will be reviewed only after the current earnings season ends, there are downside risks due to the earnings cuts.

“Quality over momentum, reasonable valuations over expensive valuations and moderate return expectations with a focus on asset allocation will be the key mantra for this Samvat 2081,” said Kotak’s Shah.

Haridasan of Axis echoed similar views.

“Stock picking with a balance of growth at a reasonable price and quality will be critical to achieving good returns over the coming year,” he said.