Equity Outlook for 2025

Authored by Vineet Sachdeva, Entrepreneur Partner-Quantitative Equity Investing, Alpha Alternatives

Tuesday 07 January 2025

After more than 4 years of great returns from equity assets post covid, 2025 is likely to see some prominent shifts in investor portfolios and subsequent returns. Though, some of the trends from the past are likely to continue, investing is a game of “probabilities”, and the following trends have a higher probability of playing out in the coming year.

Large caps: Large caps are the traditional backbone of stable portfolios. These companies with strong and large balance sheets, predictable cash flows and reasonable growth make it very appealing to low-risk portfolios. The broader macro trends, especially global uncertainty and short-term growth challenges in the domestic economy, will make investors gravitate towards safer and well-established companies. Compared to mid and small caps, large caps are trading at a very small premium to their historical valuations, thereby giving them a valuation cushion as well.

Quality: Quality has been one of the most effective strategies during turbulent markets, that inevitably follow long exuberant markets. As certain segments of the market become overheated and overvalued, companies that have strong governance, good cash flows, long operating histories and low debt, have a higher probability of outperforming. Quality as a factor, has traditionally outperformed over long periods of time in the Indian market. For the last 3 years (till April 2024), value and momentum have outstripped quality in market

performance to the extent that most “value” and “momentum” companies are trading at significant premiums to their historical valuations. The last time such an anomaly happened was in the 2005-2007 period. Reversion to the mean will likely favour quality over the short to medium term.

Numbers and data: In the past 2-3 years we have seen a lot of companies get over hyped bases on the ‘storification’ of their businesses. The earnings downgrade cycle that started in the last quarter will probably continue in the coming quarter (and maybe a few more quarters). This will prompt more and more investors to drill deeper into the performance of ‘stories’ on which valuation models were built. Although some companies will achieve or even surpass those projections, as with every cycle, a lot of companies will disappoint. The markets will likely not be very kind to these companies, and they will be punished disproportionately. Therefore, risk aversion in this segment of the market (lack of long-term delivered business performance) is likely to be disproportionately high.

Rise of alternate assets: Once investors realise that equities are not likely to give the returns they have given in the last 2-3 years; and traditional assets that dominate investments of Indian households such as fixed income, gold and real estate also not looking very promising, they are more likely to look at other asset classes to boost portfolio returns. Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (INVITs) and Alternative Investment Funds (AIFs) are gaining traction among investors who wish to diversify. Additionally, emerging instruments such as green bonds and market linked debentures could see increased demand. This pivot toward alternate assets reflects a broader shift in risk appetite, with investors balancing growth-oriented equity investments

with stable, yield-generating alternatives.

Rise of low-cost ETFs and smart beta: Passive investing has picked up in a big way in India. As more and more managers are unable to beat the market, this will likely accelerate further in the coming years. Within passive, smart beta, which is a small segment of the AUM, will likely see further acceleration as it has the potential to generate significant alpha. In the US, it is almost a USD 2.8 Trillion industry (6% of equity AUM, compared to less than 0.5% of equity AUM in India).

International diversification: In the recent past a lot of Indian investors have woken up to the diversification that international markets provide to a largely domestic portfolio. In addition to providing access to businesses that are uncorrelated to Indian markets, this also provides a hedge against a depreciating rupee. This is also likely to accelerate soon.

Conclusion:

Indian markets in 2025 are all set to tell an interesting narrative. Large-caps and

quality stocks could emerge as places to be in to protect against volatility. International investing, alternate assets and smart beta should appeal to investors on the hunt for new frontiers. Companies will have to deliver numbers to be attractive to investors failing which they may be punished disproportionately. However, as always, the key remains to being sensible —discipline, diversification, rebalancing and asset-allocation are integral elements

to achieving long-term investment goals.

Data Source: Alpha Alternatives Research, Bloomberg

Conclusion:

Indian markets in 2025 are all set to tell an interesting narrative. Large-caps and quality stocks could emerge as places to be in to protect against volatility. International investing, alternate assets and smart beta should appeal to investors on the hunt for new frontiers. Companies will have to deliver numbers to be attractive to investors failing which they may be punished disproportionately. However, as always, the key remains to being sensible —discipline, diversification, rebalancing and asset-allocation are integral elements to achieving long-term investment goals.

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