In the near term, market is expected to remain volatile, driven by a confluence of factors. In the near term, market is expected to remain volatile, driven by a confluence of factors. In the near term, market is expected to remain volatile, driven by a confluence of factors. The domestic stock markets appear to be regaining momentum in December after a decline of over 5% in the past two months. The benchmark indices, NSE Nifty 50 and BSE Sensex, have rebounded by more than 2% in the first week of December 2024. Foreign institutional investors (FIIs) have also returned, purchasing shares worth over Rs 14,000 crore in just five trading sessions, following net outflows exceeding Rs 1.15 lakh crore during October and November.
As we approach the New Year, key questions emerge: Will FIIs continue their buying spree? Which sectors are poised to deliver strong returns for investors? In an interaction with Business Today, Yogesh Patil, CIO – Equity, LIC Mutual Fund AMC, shared his insights. Edited excerpts:
Q. How do you see the domestic equity markets for the next 12 months?
Patil: In the near term, market is expected to remain volatile, driven by a confluence of factors including liquidity dynamics, evolving economic outlooks and geopolitical developments. However, signs of earnings normalisation are beginning to emerge, which is expected to be reflected in the market over the medium term.
While temporary setbacks and market corrections may occur, as they have in the past, the long-term outlook for India may continue to be bright. The country’s growth is primarily driven by capital expenditure (capex), with consumption growth expected to balance the economy over the next decade.
India's strong earnings outlook is underpinned by an emerging private capex cycle, deleveraging of corporate balance sheets, and the unfolding of a structural rise in discretionary consumption. The solid earnings outlook makes Indian equity attractive in long run. India's growth is primarily driven by capex, with consumption growth expected to balance the economy over the next decade.
Improving manufacturing, controlled fiscal deficit, and inflation will help stabilise the trade deficit and stabilise the rupee, making India more attractive to global investors in relative terms verses other emerging markets. The inclusion of Indian bonds in the JP Morgan Bond Index signals international acceptance. Historically, during such periods, quality stocks with combination of earning growth and valuation may outperform. It would be prudent for investors to realign their portfolio positions to focus on these attributes, ensuring resilience and stability amidst uncertainty.
Q. Suggest a few sectors which may deliver decent return to investors from here onwards?
Patil: Sectors such as capital goods, pharmaceuticals, IT exports, banks and non-banking financial companies may outperform in the medium term. These sectors may demonstrate earnings visibility and sustainability, which could make them well-positioned to navigate current market dynamics and deliver consistent performance.
Q. What should be the right strategy to make money in this market?
Patil: To build long-term wealth, it is crucial to focus on earnings growth and its trajectory, alongside analysing broader economic trends and identifying sectors or opportunities where growth is likely to outpace nominal GDP. Equally important is maintaining agility—being prepared to reassess and adapt strategies if initial assumptions do not materialise as expected. This flexibility allows for course correction, ensuring alignment with evolving market realities and economic conditions.
Q. What are your key takeaways from Q2 earnings? How do you see the Q3 result season?
Patil: The Q2 overall performance has been subdued and stood below expectations. Management commentary has highlighted key risks, including irregular rainfall, reduced government spending, and slower capital expenditure. Looking ahead, there is optimism surrounding festive and wedding-driven demand, which is expected to provide a boost to revenue growth in the near term and help offset some of the current challenges in the economy.
Q. What does the victory of Donald Trump mean for Indian investors?
Patil: There is widespread expectation that a Trump victory may indicate an increase in US tariffs on imported goods. For India, the overall impact might depend on quantum of tariffs relative to other countries – auto ancillaries, pharma, chemicals are some of the potential sectors impacted. IT Services could see an impact with US being the dominant end market as well as potential changes to immigration, if any.
On the other hand, impact of trade policy uncertainty is relatively lower for India.
Q. How falling rupee can further impact market sentiment?
Patil: Trump win is widely considered to imply a stronger dollar, rising US rates and trade policy uncertainty. For India, a stronger dollar is negative in absolute sense (from a foreign flow perspective) but relatively, within emerging markets context, can be subject to drivers of rotation trade into China.
Q. How do you see the Indian IT and pharma sectors from here onwards?
Patil: Past 1-1.5 years were challenging for IT companies. IT revenue growth in the US is highly correlated to the US Real GDP growth. Certain green shoots in demand environment especially in the banking, financial services and insurance (BFSI) which were on the fence, are back in the ring and could drive deal announcements across North America and Europe. Two key themes emerged in Q2FY25 –deal ramp ups with low/no project cancellations, and improvement in core markets (North America and Europe) and core vertical (BFSI). The year started on a positive note, with the sector’s earnings downgrade cycle ending after 3-4 quarters.
On healthcare side, the outlook for the pharmaceutical sector may remain upbeat for the next 12-18-month period, given moderate intensity of price erosion in the US generic market led by product shortages/supply chain disruptions and a secular growth for the domestic India Pharma Market (IPM). Structural tailwinds on contract development and manufacturing organisations (CDMO ) side of the businesses can be seen. CDMOs are poised to replace Chinese companies, as the Bio Secure Act opens new opportunities in global pharmaceutical landscape.
Q. Foreign institutional investors had sold shares worth more than Rs Rs 1.15 lakh crore in the past two months. When do you think FIIs will return?
Patil: Global capital flows relatively freely, with investors evaluating markets based on earnings growth, valuations, and the respective country risk premium. In this context, India is well-positioned, as its GDP and earnings growth are likely to be anticipated to be above the global average and relatively strong within emerging markets. Consequently, India may continue to attract significant capital inflows in the medium to long term, driven by its robust economic prospects and strong fundamentals.
Q. Which factors will drive the Indian equity market from here onwards?
Patil: India’s growth is largely propelled by several critical drivers, including substantial investments in the power sector and data centres, increased defence spending and emphasis on indigenisation, efforts to reduce the fiscal deficit, trends toward deglobalisation, and a focused government agenda on enhancing infrastructure and promoting manufacturing. These initiatives may aim to reduce import dependency and bolster export capabilities.
Q. What are the key challenges which may further dampen market sentiments?
Patil: Key risks to watch include a potential slowdown in economic growth, adverse geopolitical developments, or unexpected inflationary shocks, which could take time to stabilise. These factors have the potential to disrupt market dynamics and should be closely monitored as they can significantly impact investment decisions and overall market sentiment.