The year gone by – A snapshot

Global markets: 2024 was an eventful year with geopolitical tensions as well as political uncertainty in many economies occupying investor’s attention. From a macroeconomic perspective, markets started the year with expectations of gradual economic slowdown and continuing disinflation leading to monetary policy easing by global central banks. In the second half of 2024, the US Fed joined other developed market central banks in initiating monetary policy easing cycle with a 50bps rate cut.

The last quarter of 2024 however saw initiation of the ‘Trump trade’ upending the global market outlook. Expectations that the incoming Trump administration will implement pro-growth polices led to global money moving towards US equities. The concerns over stalling disinflation and higher fiscal deficit in the US led to a sharp rebound in US yields. The US economy continued to outperform expectations, while many economies witnessed a slowdown.

The US Dollar appreciated against most currencies (DXY rallied by 7% in 2024, with most of the gains concentrated in the last quarter), which accentuated outflows from many markets. The US equity markets rallied strongly, while many emerging markets delivered subdued performance. Despite 100bps of rate cut by the US Fed, the 10-year UST yields increased by 70bps during the year. Crude prices remained stable during the year, as subdued demand outlook weighed on prices. Gold rallied strongly with over 27% return in 2024 as many investors increased exposure as a hedge against geopolitical tensions.

Economy: GDP growth has likely bottomed out

India’s economy, which started on a strong note with over 8% growth in FY 2024, gradually slowed during the year, with September quarter growth declining to a two year low at 5.3%. Looking ahead, recovery in the rural economy, combined with increase in government expenditure, is expected to provide tailwinds to growth. Expected monetary policy easing measures by the RBI may also help revive consumer and business sentiments.

Equity Markets: Another year of gains

Amidst significant volatility, Indian markets (Nifty Index) closed CY 2024 with a 9% gain. This marked the ninth consecutive year of positive returns. Midcap (+26%) and Small Cap (+24%) indices outperformed on the back of better earnings delivery, flows and higher domestic salience. Resilience of domestic investors was exemplified with a record US$ 63 bn of inflows despite having faced global geo-political uncertainty, domestic macro-economic volatility and slowdown in earnings. Flows from foreign institutional investors (FIIs) were largely unchanged. From a sectoral perspective, Healthcare, Real Estate and Telecom outperformed while Banking, FMCG and Oil & Gas underperformed.

Outlook

CY 2024 witnessed headwinds in the form of global political and macro-economic challenges, slowdown in domestic consumption and lower corporate earnings growth. We expect gradual recovery in consumption demand and pick up in industrial activity driven by resumption of government capex and monetary easing. The outlook for global economy remains stable for now which augurs well for export-focused sectors. Post the recent correction, valuations have turned reasonable considering sustained earnings growth profile and improving economic prospects.

India is expected to be the fastest growing major economy in 2025. Well-controlled external conditions, government’s strong thrust on reforms, continued financialization of savings and healthy corporate balance sheets augur well for sustained growth in earnings. Notwithstanding near-term volatility, we continue to maintain positive stance on equities.

Fixed Income market: Debt market attracts robust FII inflows

The government has disregarded populist pressures and continued to follow the path of fiscal prudence in CY 2024. Recent revenue and expenditure trends indicate that the actual fiscal deficit for FY 2025 may be lower than the budget projection of 4.9%.

Amidst significant global macroeconomic volatility, evidence of fiscal prudence in India has helped attract significant foreign inflows in the debt markets: FII flows into Indian debt markets in CY 2024 was over US$ 18 bn. Inflows are expected to continue in 2025 as well. FTSE Russel and Bloomberg indices are expected to include Indian government bonds in their emerging market government bond indices this year.

While RBI has maintained a cautious monetary policy stance so far, the sharp decline in September quarter GDP growth, coupled with expected improvement in inflation outlook, has led many analysts to expect initiation of monetary policy easing in the near term.

Outlook: The strong domestic macroeconomic position saw the 10-year IGB yields decline by 40bps in CY 2024, despite a 70bps increase in 10-year UST yields last year. Possibility of continuation of fiscal consolidation measures in FY 2026 budget, and possible initiation of monetary policy easing by RBI, indicate that domestic yields may exhibit declining trend this year as well. However, global macroeconomic developments, volatility in currency and interest rate markets, remain key monitorables.