When FY2024 began, the mood was sombre. FY2023 ended badly as that year investors struggled to make money. Hence beginning of FY2024 was on a low note. But FY2024 turned out to be one of the best years for the investors. Leading indexes gave handsome 25 percent returns, and Mid and small caps gave as high 60 percent returns. The advance-decline ratio favoured advance as 90 percent of the companies gained, suggesting that the rally was across the board, with all sectoral indices closed in the green. So, what should we expect in FY2025? Will it be as good as FY2024?

FPIs Investment

After two consecutive years of being net sellers in FY2022 and FY2023, Foreign Portfolio Investors (FPIs) have made a robust return to the Indian market, injecting over Rs 2 lakh crore in FY2024- the second highest inflows in the history of India. A compelling narrative among FPIs fueled this surge: ‘Sell China, Buy India’. This sentiment gained traction after easing COVID-19 restrictions in China, yet the economy encountered challenges. On the other hand, the Indian economy showcased resilience through reforms, controlled inflation, and strong corporate performance.

However, historical trends suggest FPI investment slows down in the subsequent year if the previous financial year’s investment is substantial. That makes us believe one should expect moderate inflows from the FPIs in the current financial year.

Fourth year in a row positive close 

The last time Sensex closed in the red was in FY2020. This was mainly due to the COVID-induced lockdown. Since then, the market recovered handsomely. This was the fourth year in a row that Sensex closed in the green. The historic trend suggests that the market normally closes in the red after three years of consecutive gains. But it bucked the trend. If this financial year, too, the market gives positive returns, it would be the fifth year in a row-something that we experienced from FY2004 to FY2008. The Indian economy is doing extremely well, and the financial performance of India Inc. is robust. The government continues to accelerate reforms. 

…But valuations are a concern.

The market always looks at what is not priced in. Right now, positives are priced in. The Indian equity market is no longer in the cheap valuation zone. We are trading at 30x based on TTM earnings. Market cap to GDP is trading at much above the historical average. That does call for caution. It’s expected that Nifty 50 earnings will likely grow at 16-17 percent for the next two financial years- FY2025 and FY2026. Assuming that Nifty 50 does achieve projected earnings of Rs 1340 on FY2026 we are trading at P/E 17x FY2026 earnings. That leaves very little room for margin for error. Our sense is upside is limited due to rich valuations.

So, what returns can one expect in FY2025?

The historical trend does not suggest that one should expect robust returns in this financial year. One should expect either lower teen returns or higher single-digit returns in FY2025 (last year, we predicted that the market could offer returns in teens, but it surprised us positively). The valuations are going to keep the upside checked. Also, the returns would be patchy, unlike last financial year. Not all sectors will participate in this rally. Mid and small caps should do well, but our sense is that gain would be back-ended. The advance-decline ratio should be fairly even, unlike last year.

Also, monsoon is critical this year as the country cannot sustain two years of patchy rainfall. India Inc. did extremely well post covid. Hence, expectations are high, and for some reason, if it’s unable to meet the same, it can impact the sentiment. 

All in all, we believe that the market is unlikely to give good returns as it did last year. Hence, we suggest keeping expectations low this year. But this year will make a nice base for the next leg of the bull rally. Hence, the key is to remain invested but careful with stock selection. While the medium—to long-term equity outlook is strong, one needs to manage short-term expectations.