Axis MF: Annual Outlook 2025

EQUITIES OUTLOOK

2025 – A year of tempered expectations

As we look ahead to 2025, several key factors are likely to drive global markets. The incoming US government in January 2025 and its policies will play a significant role in setting the global market tone. Additionally, the monetary policies of central banks and slowing global growth will be crucial. The imposition of tariffs by the US could lead to higher inflation, and any rate cuts might be modest. The US economic growth is expected to remain strong while Europe’s growth may remain sluggish, with central banks shifting their focus from high inflation to low growth. Japan might raise interest rates throughout the year, with its economy continuing to normalize and experiencing better-than-expected growth. China could face challenges from tariffs, and any countermeasures will need to be monitored but China may continue with stimulus measures.

In India, 2024 was a year of optimism albeit for most of the year, but 2025 may bring more tempered expectations. We expect growth to remain moderate, given the fiscal consolidation and slower credit growth. Many segments of the economy are showing signs of a slowdown given the higher base and this has translated into weaker corporate earnings. Companies have seen superior earning growth led by margin improvement, strong recovery post Covid, along with government spending and policy actions. We believe factors like margin improvement may not continue for long, however continuation of prudent capital allocation policy by government to boost both capex and consumption, may drive earnings recovery. The strength of the US dollar coupled with stimulus measures in China have led to foreign fund outflows. However, these have been counterbalanced by the robust domestic fund inflows. Nonetheless, India remains one of the fastest-growing economies globally. The tariffs on China and other countries proposed by US President-elect could significantly impact global trade. However, during his first term, the tariffs on China benefited India, and this time, India might again be able to turn these trade restrictions into an opportunity.

It is pertinent to note that we begin 2025 after the strong rallies of 2023 and 2024, and elevated valuations thereof. Key events have caused volatility and rallies in equities. While our economy has been on a strong footing so far, equities are off the all-time highs and have seen a correction in the last three months. Tet valuations remain elevated. Going forward market performance could be influenced by earnings growth and absolute valuations. Given near-term growth challenges, likely muted foreign institutional investor (FII) inflows, and subdued earnings expectations, significant valuation expansion seems unlikely. We expect 2025 to be a year of stock picking across market caps. The recent corrections in mid and small caps could present opportunities to increase exposure to select stocks...