Equities gain in choppy 2024, but face valuation, volatility risks in 2025

Both the Sensex and Nifty ended flat on the final trading day of the year, closing at 78,139 and 23,645, respectively

Despite a near 10 per cent pullback from their peak, the domestic equity markets secured their ninth consecutive annual gain in 2024. However, the pace of growth decelerated compared to the previous year, as investors contended with sluggish earnings growth, a weakening rupee, and the allure of a strong rally in US markets.

 

Both equity benchmarks -- the Sensex and the Nifty 50 -- closed flat on the final trading day of the year, at 78,139 and 23,645, respectively. The Sensex registered an 8.2 per cent gain for 2024, while the Nifty 50 rose by 8.8 per cent — significantly slower than the previous year’s nearly 20 per cent surge for both indices.

 

Meanwhile, the broader market indices, Nifty Midcap 100 and Nifty Smallcap 100, outperformed, with gains of 24 per cent.

 

At their peak in September, the benchmark indices had surged as much as 20 per cent on a year-to-date basis. However, a sharp sell-off by foreign portfolio investors (FPIs) — driven by disappointing corporate earnings — put pressure on premium valuations in India.

 

Though the markets have staged a recovery since their November lows, experts warn of ongoing challenges, including a slowing macroeconomic and earnings cycle, limited room for further valuation expansion, and the possibility of continued selling by FPIs. 

 

India and other emerging markets (EMs) must also navigate potential policy shifts in the US under Donald Trump’s incoming administration, as well as the impact of China’s economic slowdown and stimulus measures on EM performance.

 

“In 2024, US growth surprised to the upside and inflation moved in the right direction, allowing central banks to start easing, risk assets to perform well, and global equities to reach new highs. But as we head into 2025, policy uncertainty has increased substantially. Many of the expected policy shifts should be positive for US equities, but a lot depends on their timing and how the rest of the world responds,” said Candace Browning, head of BofA Global Research, in a recent note.

 

Most analysts forecast another year of single-digit or low double-digit returns for domestic equities, with expectations for higher volatility than in recent years. For instance, domestic brokerages HDFC Securities and Kotak Securities have set end-2025 Nifty 50 targets at 26,482 and 26,100, respectively, implying potential upside of 10-12 per cent from current levels.

 

“The big concern heading into 2025 is that the markets are fully valued. While this doesn’t mean equities won’t perform well, we need to moderate our return expectations,” said Dhiraj Relli, managing director and CEO of HDFC Securities.

 

Foreign brokerages, such as UBS and Nomura, have also cautioned about potential de-rating in India’s market, citing high valuations and the Reserve Bank of India’s limited room to cut rates aggressively.

 

Currently, the Nifty 50 index trades at 19.6 times its estimated 12-month forward earnings, while the Nifty Midcap 100 and Nifty Smallcap 100 are priced at 31 times and 23 times, respectively. These multiples are above their long-term averages and represent a premium compared to most emerging market peers.