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Kotak MF recently shared its market outlook for the year 2025. According to a presentation made by the fund house, private banks and automobiles are the only sectors which are trading below their average 10-year P/E levels.
The outlook shares insights into the global and Indian economy as well as the domestic equity and debt markets for the upcoming year. Here are the key highlights of the outlook.
Global economy
- The world is moving from a period of ample liquidity to a period of tight/adequate liquidity
- Interest rates are also rising globally
- China’s private sector credit to GDP ratio has reached a peak of 200% in 2023
- As far as US economy is concerned, consumption now makes up over two-third of the country’s GDP
- The level of fiscal deficit in the US economy during the Biden regime is highest since the Second World War
Indian economy
- India’s Year-on-Year GST collection growth rate is lower than the nominal GDP growth rate since May 2024
- The increase in consumption due to the festival and wedding season along with increase in government spending will boost capital expenditure
- While indicators of urban demand like two wheeler and three wheeler sales have seen a decline in growth in the recent months, rural demand indicators like agricultural wage and domestic tractor sales have shown resilience
- Private capex has seen negative growth from last year in various sectors like iron & steel, non-ferrous metal, chemicals, health care and retail
Indian equity market outlook
- Market cap and profit after tax of Indian markets have grown at the rate of 241% and 257% respectively, between FY20 and FY24
- 309 stocks of the BSE 500 index have given over 100% return between January 2020 to November 2024
- 67 stocks of the NSE 100 index have delivered over 100% return between January 2020 to November 2024
- As of November 2024, 181 stocks of the BSE 500 index are trading at a PE ratio above 50
Equity asset allocation
The fund house has recommended the following themes while asking a neutral investor to have higher allocation in large cap, moderate allocation in mid cap and low allocation in small cap:
- Capex: India is already into a crucial multi-year capex cycle, which is expected to drive significant economic growth. The central govt. and listed corporate spending are likely to grow while state spending is likely to lag. The expansion in corporate order books across multiple sectors highlights the widespread nature of this cycle.
- Financial services: The gap between bank credit growth and deposit growth is narrowing which could ease pressure on margins. The banking sector valuations are reasonable when compared to the broader market and are close to long term averages for both public and private sector banks.
- Technology: India is expanding its offerings in new-age services such as AI, blockchain, and cybersecurity, positioning itself as a key player in the global tech landscape. One of the key drivers for the sector is the rise of generative AI. AI demand expected is expected to grow 15x from 2022 to 2027E.
- Consumption: Urban areas have outperformed rural consumption so far, though rural spending is now showing signs of recovery. Nuclearization of families has gone up from 34% in 2008 to 50% in 2022 which would structurally drive consumption demand.
- Healthcare: As the population ages, there's a global trend of increasing medical spending. India is well-positioned to meet this growing demand, being a major producer of pharmaceuticals and vaccines.
Indian fixed income market outlook
- Indian rupee bonds have outperformed US bonds over 10-year yields
- India’s fiscal deficit is estimated to decrease from 5.9% in 2024 to 4.5% in FY26
- Food inflation may decrease due to a bumper kharif harvest
- RBI is actively managing liquidity and can have a shallow rate cut cycle in 2025
Fixed income asset allocation
With interest rates on a structural decline but expected fluctuations, focusing on longer-duration instruments—ideally with a 12 to 18-month horizon would allow investors to benefit from potential future rate cuts.
Favorable macroeconomic conditions, potential rating upgrades, balanced demand-supply dynamics and rate cuts are likely to lead the 10-year G-Sec yield to trend lower, trading in the band of 6.25% to 6.50%.
