
With market volatility expected to persist, 2025 presents a landscape where success will be defined by the ability to identify and act on selective opportunities. A disciplined, well-researched approach will be crucial, as thriving in this environment requires a clear understanding of the challenges and potential rewards. To help shape your strategy, we’ve compiled key insights from the CW Research Desk, offering a clear view of What We Are Seeing and What You Should Know in this evolving market landscape.
2025: A Year of Selective Opportunities and Strategic Positioning
In alignment with movements in the U.S. markets, Indian equity markets experienced a modest correction of 2% in December 2024. Conversely, U.S. markets recorded a sharper decline, exceeding 4%, after reaching new highs following Donald Trump’s election. Domestically, the December quarter is expected to reflect the impact of macroeconomic headwinds, including a weaker rupee and subdued economic activity. The latter is attributed to slower consumption growth and delays in the recovery of government expenditure, both of which are likely to exert downward pressure on upcoming corporate earnings report. Markets are anticipated to remain range-bound, with expected fluctuations of 4–5% in either direction. Against this backdrop, 2025 is likely to be a year characterised by selective investment opportunities, with a disciplined and research-driven allocation strategy playing a pivotal role in achieving sustainable returns.
Lessons from 2024: Who Emerged as Market Leaders?
Mid-cap and small-cap stocks have continued to trade at a premium, significantly outperforming large- cap stocks since the start of CY2024. This surge was driven by broad-based earnings momentum and robust retail participation, propelling mid- and small-cap indices to record highs. The rally in the broader markets was led by sectors that were laggards over the past decade, such as Real Estate, Capital Goods, PSUs, Industrials, and Defense. These sectors, despite their limited contribution to large-cap indices, benefited from strong economic momentum, increased government capital expenditure and infrastructure spending, healthy order books, and an improved earnings outlook. Key sectoral gainers included Pharma (+39%), Auto (+23%) and Technology (+22%). Other sectors like Infrastructure (+16%), Metals (+8%), and Energy (+5%) also posted gains, while FMCG and Private Banks remained subdued.
What Elevated Valuations Mean for 2025
Valuations have moderated since the September 2024 highs, with mid-cap stocks trading at a 12-month forward P/E of 31x, representing a 56% premium to the Nifty 50. Small-caps are trading at a forward P/E of 23.2x - a 17% premium to the Nifty 50. While the growth outlook for these sectors remains positive, the elevated valuations of mid- and small-cap stocks warrant a cautious approach. We recommend approaching these segments with caution, particularly in cases where stock prices have surged ahead of earnings growth. The recent moderation in valuations creates an opportunity to identify selective investments, helping you position your portfolio for long-term growth while maintaining a balanced risk approach.
Key Global Factors Shaping Market
In 2025, global markets face challenges from economic and political changes. A careful and focused approach will be key to finding opportunities and achieving steady returns.
Trump’s Economic Policies and their Global Implications: The renewed focus of Donald Trump’s administration on fiscal stimulus, deregulation, and protectionist trade policies will be reshaping the U.S. economic landscape. While these measures may boost short-term growth, they also carry the risk of intensifying global trade tensions, particularly with China. The “America First” approach could disrupt global supply chains and introduce volatility to emerging markets and multinational corporations.
China’s Strategic Responses: China’s countermeasures to U.S. policies will play a pivotal role in shaping regional and global markets. Amid slowing growth, Beijing is expected to prioritise internal consumption and export competitiveness. Active currency management will remain a key tool to counter external pressures. However, any significant devaluation of the yuan could have a cascading impact on Asian economies, influencing trade balances, inflation, and capital flows.
Currency and Oil as Market Drivers: Currency markets are likely to remain volatile, particularly in Asia, as the U.S. dollar reacts to the Federal Reserve’s policy stance and geopolitical events. Oil prices remain a critical variable for global inflation. While cooling inflation may create room for interest rate cuts, a sharp spike in oil prices could reverse this trend, prolonging monetary tightening and destabilising the markets.
The Longer-Term Tailwinds Steering India’s Growth
India continues to offer a compelling investment case, combining economic resilience and structural growth drivers. However, a selective, sector-specific approach will be crucial in 2025.
Government Spending to Revive Growth: The government’s focus on infrastructure development, affordable housing, and renewable energy is expected to act as a key growth catalyst. Increased capital expenditure is likely to drive domestic demand, benefiting sectors such as cement, steel, and construction.
Easing Inflation and Rate Cuts: With inflationary pressures subsiding globally, the Reserve Bank of India (RBI) may adopt an accommodative monetary policy, creating a favourable environment for both equity and debt markets. Lower interest rates are expected to support credit expansion, improve corporate margins, and encourage consumer spending.
Currency Trends: The Indian rupee's performance will depend on global dollar trends and oil prices. A stable currency would boost India's appeal for foreign investments and support market stability. Despite volatility in global currency markets, the rupee has remained resilient, making it one of the most stable currencies among emerging markets.
Commodities Outlook for 2025
In 2025, commodity prices in India are likely to stay high as long as interest rates remain elevated. Globally, the same trend may continue due to ongoing supply chain issues, geopolitical risks (such as energy security), and inflation pressures. Domestically, India's strong growth in sectors like infrastructure, agriculture, and manufacturing will continue to drive demand for commodities. However, commodities are cyclical by nature, and while prices may remain high for now, they are vulnerable to volatility, especially if global conditions change or domestic supply chains improve.
Real Estate Outlook
The real estate market in India remains strong, particularly in major cities. Rising urbanization, better infrastructure, and government initiatives like increased CAPEX are driving demand for both residential and commercial properties. While prime locations have high valuations, there are solid opportunities in commercial real estate, especially in sectors like logistics, data centers, and office spaces in Tier-1 cities. Residential demand, especially in affordable and mid-income segments, is also growing, fueled by rising incomes and continued urban migration.
Debt Outlook
The Indian debt market in 2025 offers a mixed but selective investment opportunity. There is a growing demand for non-bank financing, particularly for small and medium-sized enterprises (SMEs) and infrastructure projects. With interest rates still high, high-yield credit markets can offer attractive returns, especially in quality corporate bonds. However, the outlook for credit markets is a balancing act, with attractive yields offset by higher credit risks, particularly in sectors with high debt levels or potential policy changes.
Key Risks That Could Impact the Estimated Pathway
Despite an improving macroeconomic outlook, certain risks could disrupt market performance:
Surging Oil Prices: A significant spike in oil prices could escalate inflationary pressures, impacting overall economic stability.
Geopolitical Disruptions: Heightened tensions could disrupt global trade and hinder the smooth flow of capital, creating uncertainty in the markets.
Monetary Policy Shocks: Persistent inflation could lead to unanticipated and aggressive actions by central banks, unsettling investor sentiment and market dynamics.
Selective Opportunities Shaping Your Portfolio
2025 will be defined by selective opportunities, with success relying on a disciplined, research-driven approach. Here’s how we are shaping these in your folio. 1. Selective opportunities are researched and chosen for your folio.
Quality in debt and hybrid terms is carefully selected to gain an interest rate premium when rates drop.
Through multi-asset strategies, you are meaningfully participating in commodities, which act as a hedge for your folio.
With global funds, we are cautiously as policy directions remain unclear.
We are also participating on both the long and short sides to take advantage of falling markets.
Real estate is being allocated through construction material activities as well as some direct funds; however, it is highly valued, warranting caution.
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