Aditya Birla Sun Life Mutual Fund Presents Annual Market Outlook 2025

Bengaluru – 08 January, 2025: The year 2025 is poised to be one of macroeconomic turbulence, with significant policy shifts and global trade uncertainties creating a volatile environment. In the US, Trump’s return to the political stage promises a range of fiscal measures including more tax cuts, stricter immigration policies, and tariffs on imports. While these policies are expansionary and inflationary, they seem to run counter to the current macroeconomic backdrop, characterized by rising bond yields, an appreciating dollar, and concerns over fiscal deficits. With inflation projected to settle at around 2.5%, the Federal Reserve is expected to cut rates by 100 basis points, leading to a peak in bond yields and the dollar in early 2025. The economic outlook in the U.S. will be shaped by the final impacts of Trump’s policy shifts, which will become clearer through the first half of the year. The broader global growth picture remains stable but fragile, with risks to the downside, particularly as the two largest economies— the U.S. and China— face significant policy shifts, setting the stage for trade tensions and increased uncertainty.

Meanwhile, China, which is more prepared than in 2016 for a potential confrontation with the U.S., faces its own set of challenges. A reliance on exports remains a critical risk as the global economy slows. Furthermore, China’s high leverage and massive capacity overhang pose a challenge for nominal growth, potentially necessitating policy shifts focused on stimulating the local economy. Despite these pressures, the resilience of India’s macroeconomic trajectory stands out as a potential beacon of stability in an otherwise tumultuous global economic landscape. India’s economic growth is projected to decelerate to 6.5% in FY26, influenced by global uncertainties, but its medium-term outlook remains positive. Inflation is expected to moderate to 4.5%, supported by food prices, while core inflation may inch higher. The focus remains on consumption and private capital expenditure, which are expected to drive the country’s growth trajectory. However, India’s fiscal space remains limited, placing the onus on monetary policy to navigate this cyclical downturn.

India’s macroeconomic stability will require maintaining external stability amidst rising uncertainties, with a policy shift towards managing the Indian Rupee in the context of global volatility. The Reserve Bank of India’s liquidity measures—such as long-term variable reverse repos, cash reserve ratio, and open market operations—will play a crucial role in stabilizing the financial system. The 10-year Indian sovereign bond yield is expected to decline towards 6.25%-6.50% range, with fixed income expected to deliver solid returns of 8%-9%. However, the risks stemming from trade wars and potential external shocks remain a concern.

Equity markets in 2024 showed a more homogeneous performance across sectors, with most categories seeing around 20% gains, a stark contrast to the vagaries seen across categories in 2023. Corporate earnings have outpaced revenue growth over the past four years, driven by shifts from unorganized to organized sectors, balance sheet deleveraging, and turnaround stories (moving from loss making to profits). Looking ahead, profit growth is expected to align more closely with revenue growth, with corporate earnings projected to grow in the low-to-mid teens over the next three years, particularly among BSE100 companies. Despite relatively low foreign FPI positioning in India compared to other emerging markets, Indian households continue to embrace the ‘buy the dip’ mentality, driving market resilience. Large-cap valuations remain reasonable, with the Nifty-50 trading at just a 5% premium to long- term historical averages on a 1-year forward PE basis, offering an attractive risk-reward proposition. Investors should focus on dark horse sectors like private banks, energy proxies, cement, and metals, while business momentum is seen in consumer durables, IT and capital goods. Conversely, real estate, defence/PSU stocks are viewed as sell-on-rise opportunities. With interest rates expected to decline, growth stocks may outperform value in the coming months. This shift could also trigger a rotation from traditional value investments toward high-quality growth stocks, which tend to thrive in lower-rate environments. As a result, we are likely to see a resurgence in the performance of the “growth” factor, as investors seek stronger earnings potential and stability.

Looking ahead, asset allocation strategies are expected to yield steady returns across different asset classes. Fixed income investments are projected to deliver returns in the range of 8-9%, while precious metals like gold and silver are forecast to generate returns between 8-12%. Equities, driven by a solid economic backdrop and corporate earnings growth, are also anticipated to provide returns in the same range of 8-12%. This balanced outlook suggests a diverse approach to portfolio construction, with each asset class offering potential for attractive returns, but with varying degrees of risk and volatility. Investors are encouraged to maintain a well-diversified portfolio to capitalize on these potential gains while managing risks effectively.

Overall, the global and Indian macroeconomic environment presents a mix of risks and opportunities. India’s growth story remains intact. However, the key to success will lie in selective investing, focusing on companies with strong cash flows, prudent capital allocation, and a long-term track record of performance. While global uncertainty looms large, India’s growth trajectory and structural story offer a solid foundation for those who approach the market with discipline and foresight.