Market will likely take its cue from the Budget, says Samco Group CEO

The 2024-25 (FY25) October-December (Q3) quarter earnings are expected to mirror those of the second quarter (Q2), with key sectors grappling with a demand slowdown. The government’s approach to the economic downturn and its priorities will become evident in the upcoming Budget, says JIMEET MODI, founder and chief executive officer of Samco Group. In an interview with Sundar Sethuraman, Modi suggests domestic markets will likely stay volatile in calendar year (CY) 2025, influenced by developments in the US markets, inflation concerns, recession risks, and interest rate decisions. Edited excerpts:

 

What were the key drivers of the equity market rally in CY 2024, and how do you see the investment landscape evolving in CY 2025?

  As CY 2024 concludes, concerns about rich valuations in Indian markets linger. However, the Indian economy’s growth potential offers grounds for optimism regarding the equity market’s performance.

 

The Indian corporate sector underperformed in the first half (H1) of FY25 due to the electoral process, which disrupted government spending and impacted key industries such as infrastructure, banking, and cement. With the elections now behind, capital expenditure is expected to rise, spurring growth in the second half of FY25.

 

Geopolitical tensions, such as the Russia-Ukraine conflict, will continue to impact global markets. The upcoming US administration shift and its policy announcements will influence capital markets appreciably. The performance of Indian equities in CY 2024 closely mirrored global trends, liquidity inflows from foreign portfolio investors, and domestic liquidity.

 

In CY 2025, Indian markets are likely to remain volatile, shaped by developments in the US markets, inflation trends, recession risks, and decisions around interest rates.

 

When do you expect earnings growth to pick up after a weak H1FY25, and will the market remain range-bound until then?

  India Inc’s earnings growth has been restrained by high interest rates. The stance of the Reserve Bank of India’s new governor on this issue, alongside changes in the US administration and its policies, will greatly impact market direction.

 

Q3FY25 earnings are expected to resemble those of Q2, with key sectors facing a continued demand slowdown.

 

The Nifty’s profit and sales growth hit a three-year low in Q2 and is not expected to show a strong rebound in Q3. The market direction will likely take its cue from the Union Budget scheduled for February 1.

 

What are the potential triggers and headwinds that investors should be aware of in the Indian market, and how might these influence investment decisions? 

The upcoming year is full of uncertainty, both domestically and internationally. On the global front, the US administration shift will be a key factor. The Trump administration’s policies on tariffs, foreign trade, and geopolitical tensions — such as the Russia-Ukraine conflict and the Israel-Hamas issue — will have considerable ramifications for global markets.

 

A flare-up in these conflicts could lead to an uptick in crude prices, which would hurt India’s economy. Also, the US economy’s response to a potential recession, along with the US Federal Reserve’s management of inflation, interest rates, and yield curve inversion, will affect US equity markets.

 

Domestically, the government’s actions post-election will be crucial. How the government handles the economic slowdown in Q2FY25 will be reflected in the upcoming Budget.

 

Which sectors or stocks could be impacted by Donald Trump’s policies, and what are the potential implications for Indian investors? 

Donald Trump’s return to the presidency has already raised concerns globally, including in India. His ‘America First’ policy could significantly affect India’s export sectors, especially information technology and pharmaceutical, which are heavily dependent on the US market. If the US imposes stricter outsourcing restrictions or higher tariffs, these sectors and the leading companies within them could face considerable setbacks.

 

What’s your assessment of current valuations, and are there any sectors or areas where you see value?

  India has historically commanded a premium due to its consistent growth potential. That said, valuations are currently higher than those of other emerging markets. Nevertheless, there are opportunities for value investing in select sectors, driven by a lower base and favourable international market trends. Media and large private sector banks present attractive value propositions. The Indian pharmaceutical sector, too, is poised for growth, stoked by emerging megatrends in the US market.

 

Which sectors are you currently overweight or underweight in? 

Investors should adopt a defensive approach, avoiding high-risk bets and focusing on select sectors. Capital goods, railways, and engineering stocks are trading at high price-to-earnings multiples, making them less appealing. Instead, consider defensive sectors like fast-moving consumer goods (FMCG), which are expected to stabilise in the next few quarters. Although FMCG stocks have faced declines and are currently at five-year lows, they are likely to perform well even in a sideways market.

 

What’s your outlook for the broking industry next year? This year, many new regulations impacted the industry.

  The broking industry is in a phase of transformation. Regulatory changes are clear: the industry must move away from excessive speculation and indirect revenue generation. These shifts have led to a decline in volumes across various segments, affecting brokers’ top lines. Changes such as the removal of weekly expiries, higher lot sizes, and enforcing true-to-label transaction charges have contributed to a decrease in trading volumes.

 

The true impact of these changes will begin to unfold with the January monthly expiry. Rising compliance costs and reduced volumes are undermining the viability of discount broking models, signalling the end of the ‘free brokerage’ era.

 

Top brokers who once offered brokerage-free delivery transactions have begun charging for these services. The industry now awaits leaders to initiate brokerage fee hikes, with others likely to follow suit.

 

As the price war subsides, the broking industry will be governed by the survival-of-the-fittest principle. Only those with distinctive value propositions, unique offerings, and a competitive edge will thrive in this tough environment. 

The market road ahead

 

*  VALUATION VS GROWTH: High valuations, but strong growth potential

  *  CAPEX REBOUND: Post-election surge in capital spending

  *  GLOBAL FORCES: Geopolitical tensions, US policies impact mkts

  *  2024 TRENDS: Indian equities track global moves and liquidity

  *  2025 VOLATILITY: Markets to swing with US and inflation shifts