Markets Were Down Last Week, 2025 Will Be Muted
It is always a tough time to call markets when the institutional investors are on holiday
On Episode 473 of The Core Report, financial journalist Govindraj Ethiraj talks to Jay Kothari, Senior Vice President, Global Head International Business and Lead Investment Strategist at DSP Mutual Fund.
(00:00) The Take
(07:14) Markets were down last week, 2025 will be muted.
(09:25) CLSA dumps HDFC Bank from portfolio, focusses on Tata Motors and NTPC, among others.
(12:12) Crude oil prices hit a 2 month high.
(13:47) Foreign investors bought barely half a billion dollars net last year but not all FIIs are the same and some are more faithful than the others.
(24:42) Forex reserves down $13 billion in three weeks to $640 billion.
(25:48) After Ford, its time for pizza maker Papa John to return to India
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday, the 6th of January and this is Govindraj Ethiraj, headquartered and broadcasting and streaming like always from Mumbai, India’s financial capital.
The Take: Which Narrative Should I Believe?
What does 2025 hold for us, as an economy and for businesses ? What are the factors that will determine growth and prosperity in the year ahead ?
I would like to pose this question differently; what does 2025 not promise and what does that mean for businesses and investments ?
This leads to what economic narrative we choose to believe.
Going into 2025, we were gathering the impression that the slowdown we saw in corporate profits in the second quarter from July to September 2024 was somewhat one off and a result of several factors from heat waves, excessive rains and elections that held back growth.
The consensus that was building up was that the new year would see an upturn in many ways.
It appears that we may have already overestimated a bounce back. This is important for strategic reasons I will come to.
I read through two sets of commentaries put out by two economists, one from HSBC and the second from Axis Bank and I will refer to both because they illustrate the dramatic reset in expectations.
The first one says while some consumption growth will return, there is also a need for a reality check.
Which is that India’s potential growth, or the ability to grow sustainably without driving up inflation or external balances - is actually 6.5% and not the 7.5% number of the last two years.
Moreover, says the HSBC report, the bulk of the growth exuberance of the past few years has been led by the rise of the new India, a small but fast growing part of the economy, which is 15% of GDP and is also growing at 15% of GDP which also comprises several high tech sectors.
This new India has driven heady growth in everything from mobile phones to price real estate and premium goods.
This of course continues to be the case though is now showing some early signs of slowing down because there is only that much premium real estate one can buy.
By the way, a report by Japanese brokerage Nomura says India is in the midst of a cyclical slowdown, and this evidence of household balance sheet stress aligns with weak income growth and K-shaped urban consumption demand.
Essentially, says Nomura, subprime borrowers are primarily taking on consumption loans, while those better off are leveraging to buy assets, suggesting a K-shaped credit market in India.
To return to the HSBC report, the good news, it says, is that 6.5% growth is still pretty impressive in the current global order.
This of course is a narrative within a narrative but something we can park for now.
The challenge now, says HSBC, is to maintain this level and for that growth needs to be more broad-based.
Unbalanced growth, as we have seen in the past, can lead to excesses and eventually become unstable, the report says, quoting the example of how urban consumption over the last year expanded strongly alongside thanks to an unfettered rise in unsecured consumer loans, eventually requiring the central bank to clamp down.
So to conclude there is a problem with the 7.5% GDP growth narrative, built over a 8.1% growth figure we saw last year and the general sense of post pandemic consumption euphoria.
Then comes the next report, which is authored by the economists at Axis Bank around the Government’s second Household Consumption Expenditure Survey (HCES).
Unlike another report by the State Bank of India team which concludes that among other things, poverty in India has crashed below 5% and thus all is hunky and dory, this one expresses some scepticism.
Getting into the details can be a little weighty here and all the reports are in the public domain.
Axis Bank says the survey shows some trends that contradict anecdotal evidence/other data. It also concludes that respondents not being truthful is a common problem, something other economists have also pointed out.
This survey, which suggests that consumption inequality has fallen, may be best used as a snapshot rather than for trends, says the Axis report, adding that these trends are surprising, and contrary to reported revenues for listed firms as well as anecdotal evidence.
Speaking of anecdotal evidence, consumer products company Dabur said last week that its revenue rose in the low single-digit percentage range in the third quarter due to subdued demand for healthcare and beverage products.
Analysts, on average, had expected revenue growth to pick up to 4.8% in the October-December quarter, Reuters said, from a 5.5% decline in the previous quarter, which was the first drop in quarterly revenue since 2020.
Dabur India, much like its peers in the sector, has struggled with the double whammy of increasing costs for raw materials and low consumer demand due to high inflation, especially in food prices.
The company said demand from rural consumers continued to rebound faster than in urban regions.
Interestingly, it said it had partially mitigated high input costs through price hikes and by cutting other expenses.
Which means other companies are doing the same thing or similar.
Narratives are important.
They give us a sense of direction when things are going well.
But they can also confuse and cause us to project outcomes which may not be feasible, when we should be using the same time and energy to shift strategies and go perhaps defensive.
This has quite likely happened with several companies in recent months whether they admit it or not.
This is the strategic part of what I referred to earlier.
The automotive sector is a classic case of producing more cars and dumping them on dealers because they were so confident of demand all the while choosing to ignore the early signals of slowing down, at least in the domestic market.
The real estate market will also see some version of this recalibration.
2025 will be a year of careful moderation and calibration even as we recover from the hangover of a four year party, pretty much like someone who has imbibed too much on New Year’s Eve, fun as it was while the music was playing.
2025 will also be the year we will be or hopefully will be more careful about which signals to look for and what to ignore.
That brings us to the top stories & themes of the day:
Markets were down last week, 2025 will be muted.
Crude oil prices hit a 2 month high.
CLSA dumps HDFC Bank from portfolio, focusses on Tata Motors and NTPC, among others.
Foreign investors bought barely half a billion dollars net last year but not all FIIs are the same and some are more faithful than the others.
Forex reserves down $13 billion in three weeks to $640 billion.
After Ford, its time for pizza maker Papa John to return to India
Markets Down
It is always a tough time to call markets when the institutional investors are on holiday, this applies as much to equities as it does to commodities like oil, unless something big happens and everyone boots up their trading screens.
When things are not looking very good right now, it is also a good time to look back.
The Sensex closed 2024 with a 8.2 per cent gain, adding 8,809 points to its tally and peaking at an all-time high of 85,978.
The Nifty50 was up 8.8 per cent in the year, this was the ninth consecutive year of growth for the indices, which have risen nearly 200 per cent over this remarkable run.
Now that you have digested that, let us return to last week which saw the BSE Sensex and NSE Nifty50 end the week's last trading session in negative territory.
The 30-share Sensex shed 720.60 points or 0.90 per cent to settle at 79,223.11.
The NSE Nifty50 closed at 24,004.75, with a loss of 183.90 points or 0.76 per cent.
Broader markets mirrored the benchmarks as the Nifty Midcap 100 and Nifty Smallcap 100 indices ended lower by 0.30 per cent and 0.24 per cent, respectively.
Back to feeling good, India’s domestic market capitalisation, as per reports, rose some 18.4 per cent to $5.18 trillion in 2024, adding $806 billion.
This made India rank third globally among the top 15 major markets, both in percentage and absolute terms.
On the other hand, the US markets were up 25.6 per cent, or $12.9 trillion increase in market cap to $63.3 trillion.
Interestingly, the world market cap rose by $13.8 trillion, or 12.4 per cent, to $125 trillion during the current calendar year, with the US market alone accounting for 93.6 per cent of the gain, Business Standard reported.
All of this also means that 2025 will be muted, something that fund managers have been saying in the last couple of months and with increasing intensity in recent weeks.
More on that shortly.
Muted returns for 2025
CLSA Securities, a brokerage, has said that an uncertain and risky global macro environment along with a near-term economic growth slowdown in India in the face of elevated absolute and relative valuations are making them forecast muted returns for the Nifty in 2025.
Underperformance of actual capex spending versus expectations and rising tailwinds for affordable consumption make us favour this sector and raise staples to a big overweight, it says in its report dated 3 January..
CLSA says after skimming for large cap stocks which have fallen over 20% from highs, they have now added Tata Motors, NTPC, Nestle and Britannia to our India focus portfolio.
On the other hand, perhaps not so surprisingly to some, it says they have removed HDFC Bank and cut our overweight in banks.
CLSA says it remains overweight commodities and insurance. IT, discretionary, industrials and healthcare are our big underweights.
Along with expensive bonds and currency versus global peers, Indian equity valuation remains well above their own long-term average as well as their relative premium to peer markets plus bonds. This may keep absolute Nifty returns muted in 2025.
CLSA, like many others, is pointing out that tThe last six months has seen a prominent increase in the government’s willingness to raise spending on welfare schemes, particularly around state elections to attract voters.
These, along with a rise in crop sowing plus good rains, should improve rural incomes and help in driving some recovery in affordable consumption.
It also says that after the recent pull back we find large cap affordable consumption names trading at much lower premiums to historical averages than the massive premium seen in investment and capex stocks.
This also highlights the rising consensus that public spending driven growth is not likely to hold since capital expenditure by both central and state Governments has slowed even as funds have moved towards welfare, something we have discussed here on The Core Report in recent weeks.
These may drive at least a short-term shift in favour of stocks in consumption and some cool-off in the elevated valuations of investment and capex names, says CLSA.
More broadly, says CLSA, the recent correction in the market has been quite steep and we find more than half of the NSE 200 stocks trading more than 20% below their 52 week highs. Of these, we find about 30 companies with positive CLSA recommendations.
Crude Oil Prices
And our special energy segment supported by India Energy Week kicks off this week.
We will have more insights and interviews around energy in coming weeks but for today a quick sum up.
Crude oil prices were up last week and gained for the week thanks to cold weather conditions in Europe and the US apart from a perceived demand uptick in China thanks to an additional economic stimulus
Oil prices edged higher on Friday and were on track for weekly gains as cold weather in Europe and the U.S. as well as additional economic stimulus flagged by China helped push prices in the previous session to their highest in more than two months.
Brent crude futures were holding around 76.51 over the weekend.
Brent was on track for a 3.3% weekly gain, while WTI was set for a 5% increase, Reuters said last week, adding that oil is likely to have gained some price support from expected increased demand for heating oil after forecasts for colder weather in some regions.
Also supporting prices, U.S. crude stockpiles dropped by 1.2 million barrels to 415.6 million barrels last week, Reuters reported adding that U.S. gasoline and distillate inventories jumped as refineries ramped up output, though fuel demand hit a two-year low.
Meanwhile, watch out for the India Energy Week 2025 scheduled from February 11-14, 2025, more details in the show notes.
FPI Flows Crashed In 2024, Diving Into The Numbers And Outlook
As of 24 December, foreign portfolio investors (FPIs) have made a net investment of Rs 5052 crore in the Indian equity market which is less than a billion dollars or just above half a billion dollars.
Contrast this with the near $20 billion of net equity investment in 2023.
Interestingly, the debt market saw net inflows of $13 billion.
The financial services sector experienced the highest outflows followed by the oil & gas sector and fast-moving consumer goods (FMCG).
There are of course some nuances to the number.
The larger point is of course that all foreign portfolio investors are not the same and some continue to be more faithful to the Indian markets than others.
I spoke with Jay Kothari, Senior Vice President, Global Head International Business and Lead Investment Strategist at DSP Mutual FUnd and began by asking him why we saw such sharp outflows last year and what 2025 was looking like .
INTERVIEW TRANSCRIPT
Jay Kothari: So as far as the flows are concerned, they've been very contrast in terms of the domestic and foreign. So domestic, you've seen almost $63 billion come in in 2024. In contrast, the FBIs have been negative $100 million for the year that is 2024.
That is on equities. If you look at fixed income, it was around $13 billion positive. But I think the devil isn't always in the details.
So if you just look at the $100 million negative flow, it kind of paints a negative picture immediately when you read that number from an equity perspective. But I would urge investors to kind of look at the holistic view in terms of when you dissect this flow, it is a mix of $20 billion, which was positive for funds, you know, which are tracked by EPFR, which is, let's say, the India dedicated funds, which is ETF and non ETF and active managers like us, like the USITS and you know, many of the other funds which are available in the Europe, Middle East, Africa, US, etc. So which are India dedicated. So that's almost a $20 billion inflow, which is a point to be noted.
In contrast, there was a $20-25 billion outflow from the stock of money which has been invested through the years. So in a nutshell, if there is a trillion dollars invested by FBIs in India, they sold around 1-2% this year, which is all right, which is understandable. And when this selling kind of stops, you'll suddenly start seeing $15-20-25 billion every year come into Indian equities.
Govindraj Ethiraj: $20 billion that you're referring to, which is the more dedicated flows, what does that signify? How does it get broken down?
Jay Kothari: Sure. No, I think the way to look at is that, you know, investors like you and me abroad who kind of are looking at India investments, they are allocating capital actively or passively, right? So through funds or through ETFs or passive or actively managed equity funds like ours.
So they kind of allocate capital, including the allocation funds. When you talk about the allocation money into emerging markets and then which flows into India, this is that money where people are actually investing their funds through the fund route versus a direct equity route like the pensions and the hedge funds and the family offices or the sovereign wealth funds, which have access to India or the markets on a direct basis rather than an indirect basis through funds.
And that is the stock of money, which is much larger. So to give you a ballpark, out of the trillion dollars, which I mentioned, which FPI has invested, the actively managed funds are around $100 billion, including the passive versus the $800-900 billion, which has been invested through many of the other routes. Now, from that, they must have kind of rotated back to China or any of the other emerging markets, which saw a selling from that bucket versus the fund bucket, which was positive.
So net-net, they became negative for the year. But if one of the negative buckets kind of even becomes slightly marginally positive or reduces their selling, automatically you will see the flows kind of positive on the other side or on a cumulative basis.
Govindraj Ethiraj: And how has this trend been? So you said, again, just holding on to that figure of $20 billion last year for actively managed India-focused or India-aimed funds. How would that compare to previous years?
Jay Kothari: Again, a positive one. Last year, it was around $7-10 billion. It wasn't negative.
So the idea is that when you look at the headline number, which we all follow the NSDL numbers, which you saw $100 billion negative. My only point is that look at in composite, look at the dissection. So just the way you look at the Indian figures in terms of the DIIs, that is insurance, mutual funds, and then direct equities.
So in a way to understand is that let's assume direct equities was negative, just hypothetically internationally. And on the other side, mutual funds insurance were positive. So that is an important kind of aspect.
And going forward, we feel that this trend will continue. India is looking kind of positive from an allocation perspective. It is underweight as far as global funds are concerned, including the emerging market and the Asia funds are concerned.
So I think once that settles down, geopolitics plus the tariff wars or all the uncertainty and the valuations have seen a time correction, money will come back.
Govindraj Ethiraj: So in a good year, would the percentage of proportion of active and direct funds be about 10% to 20% of the total?
Jay Kothari: So the way to look at it is that the structural story of the flows, and I'm just kind of shifting gears here in terms of the domestic flows. So the way to look at it is that let's assume India is a three and a half trillion dollar economy. Let's say $4 trillion.
And if we save 30% every year, it's almost $1.2 trillion of savings every year. Indians still don't save more than 5-7% to equities. So let's say 10% moves to equities of the $1.2 trillion. It's $120 billion a year. We've already seen $63 billion this year. So this is a potential which is unleashing.
And hence, this is definitely structural and not just a tactical flow which is coming once in a while. So we feel this will kind of, this should continue as a trend as financialization further picks up.
Govindraj Ethiraj: So that's the domestic part. And the overseas part?
Jay Kothari: Overseas part, again, you're talking about $100 trillion global economy and a market cap. So even if we all cap world index, which has 2% to 3% in India, so you can expect that is the amount of flow should be allocated. So on a yearly basis, if there is, let's say, $300-$500 billion, which gets allocated very hypothetically.
So 2% of that, 3% of that should be allocated to India on a consistent basis. And this I'm talking about even if you were to be just neutral on India. If you go overweight, this number could go slightly higher.
Govindraj Ethiraj: So if I were to pick up on some themes, Jay, so 24, again, we are looking at calendar, the highest or amongst the highest outflows were seen in sectors like financial services, oil and gas, consumer products, that's FMCG. Now, how is that looking to you? When I say how is that, I mean, what sectors are you seeing, either from a positive or negative point of view for 25?
And do you see any other sector themes that are playing out?
Jay Kothari: The way we look at DSP is very clear in terms of we are kind of sector agnostic. We look at companies, you know, as far as the earnings growth and ROEs are concerned. So we look at all sectors.
But having kind of said that, financial services, NBFCs, you know, a few of the kind of CAPEX themes, CAPEX should pick up now, you know, second half of the year after a slow first half. And over the next three to five years, you will see kind of momentum in roads, railways, you know, kind of water, defence, you know, these are a few of the themes which could be played out, new age sectors, you know, which could also kind of look very interesting. So net net, I think the way to look at India is a more holistic view, look at more companies across sectors, you'll find good companies across sectors.
And that's what our focus has been.
Govindraj Ethiraj: And finally, the valuation question, how are valuations looking going into 25, both from a, I mean, or rather, particularly from a foreign portfolio investor, because they are the section of investors who are more likely to sell, as it appears today.
Jay Kothari: As far as valuation is concerned, so look at India and US are very similar, right? So when you look at US, it's not particularly cheap, but still money is flowing there, because you see a few of the companies doing well, that's the earnings coming through. So I think one variable from an India point of view is to track the earnings going forward.
If the earnings kind of are able to give you those 12, 13, 14% kind of CAGR over the next few years, after a 25% CAGR over the past two, three years, that's something which we would focus on. Number two is that, you know, the general sense in terms of valuation is about the perspective. If you're investing for the next six to 12 months, of course, it's going to be extremely challenging to expect returns, because valuations are at kind of reasonable levels, or maybe at averages, maybe not at the peak.
But if you just kind of dissect this one very important point, if you look at the 10-year trailing numbers for the PE ratio of the market, what used to be 14 times, which we were used to seeing in 2007 to 2010, which is now 20 times, it looks expensive. But if you dissect it, only 14% of the companies within the index used to be more than 30 times price earnings multiple. Now that number is more than 50%, which tells you that the composition of the index has moved or shifted dramatically, and hence the PE ratio is looking more expensive optically.
But if you kind of further dissect into index, it's good quality companies growing at kind of consistent basis. And hence, you should not just look at the PE and decide whether to invest or not. Look at the next three years, five years, your perspective changes.
Govindraj Ethiraj: Last question, we started with debt, and we touched upon the $13 billion that we saw in debt net, whereas as compared to barely maybe $600 million in equities. So is there a sentimental consistency between debt and equity from the foreign portfolio investor point of view? I mean, should we take away anything from that?
Or are these two very, very distinct categories?
Jay Kothari: The debt flows, first of all, to answer your question, yes, it's slightly different. So one can't, you know, paint it with the same brush. But the last two year flows into Indian fixed income was $8 billion and $13 billion, 23 and 24, was mainly driven by the sentiment around the global bond inclusion, India's inclusion in Bloomberg and JP Morgan, and, you know, the momentum which is coming there.
So these are the allocation effects which are happening. But in terms of incrementally, when you're kind of even the dynamics in terms of the yield expectations, so if you're getting X percent in the US versus India, and with the currency, with the way it's behaving, there are a lot of variables to kind of underplay before you get into that number, whether it will be a positive or negative for the year. But net net, I think if the fisk continues to remain palatable, the fixed income flows will also kind of continue in the foreseeable future.
Govindraj Ethiraj: Jay, it was a pleasure speaking with you. Thank you so much for joining me.
Jay Kothari: Always a pleasure. Thank you, Govind.
Forex Reserves
India's foreign exchange reserves fell for the fourth consecutive week and stood at an 8-month low of $640.28 billion, as of Dec. 27, data from the Reserve Bank of India showed on Friday, quoted by Reuters.
The reserves declined by $4.1 billion in the reported week, after falling by a cumulative $13.7 billion in the prior three weeks.
Meanwhile, the rupee weakened to its all-time low of 85.8075 last week, down nearly 0.3% during the period.
Concerns about India's slowing growth and widened trade deficit have hurt the rupee, alongside broad-based dollar's strength amid a hawkish shift in the U.S. Federal Reserve's policy outlook and expectations surrounding the country's President-elect Donald Trump's policies, reported Reuters.
The feeling is that the RBI has likely been selling dollars via state-run banks to curb weakness in the rupee and prevent a large-scale slump.
The rupee settled at 85.77 on Friday. The domestic unit was down 0.2% for the current week, its ninth consecutive weekly fall.
Papa John Is Back
And some good news on how the Indian market continues to look attractive and for pizza lovers.
U.S. pizza chain Papa John's International plans to make its return to the Indian market in 2025, a year later than planned, while many Western brands rethink their plans as inflation hits consumer spending, Reuters is reporting.
Earlier, Ford said it was returning to India and so did Harley Davidson through different means, though pizzas are arguably different from cars and bikes.
Papa John's left India in 2017 saying its restaurants were not able to meet the expectations of the brand and the franchisee.
Papa John would compete with American brands like Domino's Pizza and Pizza Hut who have stayed on and of course become popular brands in India albeit facing stiff competition from local brands.
India "remains a priority" and the company will open its first restaurants this year, a spokesperson for Papa John's said by email to Reuters.
Under plans outlined in 2023, the company aimed to scale up to 650 outlets over a decade.
"India is a complex market with unique consumer preferences. We are taking the necessary time to ensure our franchise partner opens with the right products and menu, technology, and restaurant footprint to ensure their long-term success," the company said.
Papa John's has more than 5,900 locations in about 50 countries and territories, according to its website
