Near-term returns may be moderate due to elevated valuations in equity market, S. Naren, executive director and chief investment officer, ICICI Mutual Fund said while presenting the market outlook for 2025
The year gone by (2024) was nothing short of extraordinary for the capital markets. The market witnessed robust fundraising through initial public offerings (IPOs), qualified institutional placements (QIPs), and secondary sales. These events marked the year as one of the healthiest in recent history, despite the challenging global environment.
Incidentally, it was not just the equity market that performed well; there was a simultaneous rally in gold and silver, too.
“What stood out was the simultaneous strong performance of equities, gold, and silver—a rare occurrence. Typically, gold and silver perform well during market downturns, but 2024 defied this norm,” S. Naren, executive director and chief investment officer, ICICI Mutual Fund said while presenting the market outlook for 2025.
Caution On Corporate Risk
Naren said a significant shift in market dynamics emerged in 2024: corporate risk-bearing increasingly moved away from banks and on to the shoulders of investors.
He cautioned investors about these changing dynamics.
“Unlike previous cycles where banks bore the brunt of corporate lending risks, this time, the responsibility largely shifted to investors. Corporates are now funding projects through IPOs and QIPs rather than relying on banks. Consequently, investors must be cautious and embrace asset allocation – balancing equity, debt, gold, and other asset classes,” he said.
Large-Cap Still Attractive
Given the recent correction due the selling pressure of foreign institutional investors (FII), Naren said he believed that one area of potential opportunity lay in mega-cap stocks – those with market capitalisations above $50 billion. These stocks have underperformed relative to their smaller counterparts, presenting a relatively safer investment avenue for investors seeking long-term growth.
“While large-cap stocks have seen recent corrections and remain relatively attractive, they are not significantly undervalued” said Naren.
In contrast, small and mid-caps, despite outperforming in 2024, continue to carry high valuations, which are seen as unsustainable in the long run. Domestic investor enthusiasm for small- and mid-cap stocks, driven by strong local demand, helped keep these segments buoyant, even as FIIs exited from large-cap stocks, he said.
“Our cautious stance on small- and mid-caps hasn’t played out yet, but we believe valuations will correct over time,” he added.
Focus On Asset Allocation
Looking ahead to 2025, market conditions are expected to remain volatile, with stretched valuations in several segments, particularly small- and mid-caps.
“We recommend focusing on hybrid funds and systematic investment plans (SIPs) in large-cap or flexi-cap funds. Asset allocation remains our core strategy for managing risks in a volatile environment,” he added.
He said a reversal in dollar strength could prompt global asset allocators to reconsider emerging markets.
“India’s long-term structural story remains intact. While near-term returns may be moderate due to elevated valuations, disciplined asset allocation and contrarian investing will help navigate the market,” he further said.