Market Outlook – December 2024

Date: 18 Dec, 2024

Domestic Updates

The Nifty 50 experienced significant volatility in November, closing lower for the second consecutive month with a 0.3% decline (following a 6.2% drop in October). This was driven by valuation concerns, disappointing Q2 corporate earnings, and continued foreign investor selling. Despite this, the Nifty 50 remains up 11% year-to-date in 2024. Over the past year, mid- and small-cap stocks have significantly outperformed large-caps, with gains of 31% and 32% respectively, compared to 20% for large-caps.  

^{Source - 1 IDBI Capital}

In November 2024, Indian equity markets saw a divergence in investment flows. Domestic Institutional Investors (DIIs) injected USD 5.3 billion, while Foreign Institutional Investors (FIIs) recorded a second consecutive month of outflows, totaling USD 2.2 billion. This brought FII outflows for the year-to-date (CY24YTD) to USD 2.1 billion, a stark contrast to the USD 21.4 billion inflow in CY23. Conversely, DIIs maintained strong inflows into equities, reaching USD 58.9 billion CY24YTD, significantly higher than the USD 22.3 billion in CY23. Despite secondary market selling, foreign portfolio investors (FPIs) demonstrated sustained interest in the Indian primary market in November 2024, investing USD 2.1 billion (INR 17,704 crore) through IPOs and QIBs. This strong primary market participation has driven FPI investments via this route to USD 12.4 billion (INR 103,601 crore) in CY24YTD, more than double the USD 5.2 billion (INR 43,347.1 crore) invested throughout 2023. This surge in primary market investment is attributed to increased IPO activity, with 79 mainboard IPOs raising nearly INR 1.4 lakh crore in 2024 – a record high.  

In November 2024, India's bond yield held steady at 6.7% (a low not seen since February 2022), while the US yield climbed to 4.2%. Consequently, the yield spread remained unchanged month-over-month at 2.6%. This moderation in the US 10-year yield is attributed to reduced political risk, leading to increased demand for sovereign debt. Looking ahead to December 2024, we anticipate India's 10-year yield will fluctuate between 6.70% and 6.85%, contingent on the Monetary Policy Committee's (MPC) decision regarding the repo rate and its accompanying communication. 

During FY20-24, corporate earnings grew at a robust pace, but have since slowed in the first half of FY25. In particular, Nifty-50 earnings saw their weakest quarter in 17 periods in 2QFY25. However, excluding global commodities, core earnings remained healthy. Consequently, analysts have slightly lowered their FY25 Nifty earnings outlook, now anticipating more modest growth - the first time in five years that growth has dropped to single digits. 

Macro Update 

reflects the nation's strong fiscal health and successful economic recovery amid global uncertainties. While policymakers are optimistic about continued spending in rural areas, they are cautious about potential slowdowns in urban demand. These factors are expected to play a key role in India's economic growth. 

India's merchandise trade deficit soared to a record $37.84 billion in November, up from $27.1 billion in October, driven by a surge in imports and a decline in exports. November saw $32.11 billion in exports and $69.95 billion in imports. This widening deficit could further weaken India’s currency, which depreciated 0.5% against the dollar last month, its worst performance since March. Amidst these economic developments, India and Britain are set to resume free trade agreement talks by the end of January, following two years of intermittent discussions.

Industrial production rebounded in September 2024, growing by 3.1% after a 0.1% decline in August. Manufacturing led the recovery with 3.9% growth, while mining and electricity output benefited from favorable seasonal factors. Although H1FY25 growth slowed to 4% from 6.2% the previous year, upcoming festive demand and the harvest season are expected to further boost production, with recovering government spending potentially driving private investment. 

In November 2024, India's Consumer Price Index (CPI) inflation eased to 5.48%, down from 6.21% the previous month, bringing it within the RBI's 2-6% target range. Wholesale Price Index (WPI) inflation also decreased, falling to 1.89% from 2.36% in October. The Ministry of Commerce & Industry attributed this easing primarily to slower growth in food prices, although increases were still seen in sectors such as food products, manufacturing, textiles, and machinery. Food inflation itself saw a significant drop, from 11.59% in October to 8.29% in November. Vegetable prices, a key component of food inflation, saw a substantial deceleration in year-on-year growth (from 63% to 28.57%) due to a robust summer crop harvest supported by favorable monsoon conditions. 

India's economic growth decelerated to 5.4% in the second quarter of fiscal year 2025 (Q2FY25), down from 8.1% in the same period of the previous fiscal year (Q2FY24). This slowdown was primarily driven by reduced government spending (4.4% growth compared to 14% in Q2FY24), weaker investment demand (5.4% growth versus 11.6% in Q2FY24), and slower export growth. However, private consumption remained strong, accelerating significantly to 6.0% in Q2FY25 from 2.6% in Q2FY24. For the first half of FY25 (H1FY25), India's growth reached 6%, a decrease from the 8.2% recorded in H1FY24. Despite this moderation, a strong rebound is anticipated in the second half of the fiscal year (H2FY25), projected to boost overall FY25 growth to between 6.6% and 6.8%. This expected recovery will be fueled by increased capital expenditure (capex) from both the government and private sector, robust agricultural growth, and further strengthening of consumer spending. Corporate commentary from quarterly results analyses also indicates expectations of increased demand in H2FY25. 

International Updates

Driven by hopes of continued Federal Reserve rate cuts, potential Trump-era tax cuts, and reduced regulations, US stock indices surged in November. The Dow Jones Industrial Average and S&P 500 posted their largest monthly gains of the year, climbing 7.5% and 5.7%, respectively. The Nasdaq Composite advanced 6.2%, its strongest showing since May. Small-cap stocks, as measured by the Russell 2000, led the rally with a 10.8% increase, fueled by expectations of disproportionate benefits from Trump's proposed tax cuts. This strong performance also reflects market anticipation of further interest rate reductions by the Federal Reserve in the coming year, following a 75 basis point decrease in 2024. The election result and subsequent promises of tax reductions, deregulation, and increased import tariffs have amplified expectations of US stock market outperformance compared to other global markets. 

In November 2024, major central banks like the US Federal Reserve (Fed) and the Bank of England (BoE) lowered their policy rates by 25 basis points, aligning with market expectations. The Fed's decision considered the softening labor market but also expressed concerns about high inflation and unsustainable fiscal policy. Market forecasts suggest another 25 basis point cut in December 2024, followed by more moderate cuts in 2025. The BoE's move marked its second rate cut in four years. Conversely, the Bank of Japan (BoJ) hinted at a potential 25 basis point rate hike as early as December 2024, driven by sustained inflation and wage growth. 

Rockstud Capital Market Outlook

Indian stock markets witnessed a correction of approximately 8% from their recent highs during the period of September to November 2024. This decline was attributed to a combination of domestic and global factors. Domestically, concerns over moderating corporate earnings growth and elevated valuations, particularly in midcap and small-cap segments, weighed on investor sentiment. Concurrently, global headwinds such as geopolitical tensions in the Middle East and a strengthening US dollar following the Trump administration's victory further exacerbated market volatility. India's market capitalization-to-GDP ratio has exhibited considerable fluctuations, falling to 57% of FY20 GDP in March 2020, rebounding sharply to 132% in FY24, and currently reaching 138% of FY25E GDP, surpassing its long-term average of 85%. 

Given the absence of any immediate catalysts, we foresee Indian markets trading within a range in the short term. The upcoming quarters will be crucial, as any supportive monetary or fiscal measures could significantly impact corporate earnings. While large-cap valuations have become more attractive, mid and small-caps still appear overvalued – Nifty-50 is now trading at 19.6x FY26E EPS. We anticipate the broader market to deliver single-digit to mid-teen returns in the coming year. However, selective stock-picking in sectors with strong fundamentals and reasonable valuations remains a viable strategy.