Mutual Funds: 4 Themes To Bet On In 2025

By Sanjay Chawla, Chief Investment Officer Equity, Baroda BNP Paribas MF

We started off this year with almost half of the global population (more than 60 countries) going into national elections including the world’s two largest democracies, geo-political issues still being unresolved and the promise of the interest rate cycle getting reversed. All of this meant higher market volatility, which we did witness.

More importantly, the market was a tale of two halves. Indian Equity Market was one of the best performing globally in the first half, whereas second half witnessed lagging performance. The lag was on account of combination of dollar strength and slowdown in Indian economy due to national elections and monsoons. This resulted in slower than expected earnings growth.

That said, the broader market as represented by NSE500 Index returned 18.1% during the 11-months ended on November 30, 2024. This translates into a 3-year compound annualized rate of growth (CAGR) of 17.2%, 5-year CAGR of 19.9% and 10-year CAGR of 14.6%. This data once again illustrates how Indian investors can create wealth for themselves and squarely beat inflation by systematic investment in equity mutual funds.

Domestic flows in mutual funds continued to be strong at INR6.2 trillion* (cumulative for Jan-Nov 2024). The year also witnessed some large IPOs like NTPC Green Energy, OLA Electric Mobility and Swiggy Ltd& – signifying the changing landscape of the Indian economy.

As we step into 2025, we believe that these emerging themes would only become stronger. Specifically, we expect 3 macro themes to shape next year’s performance –

1) The new dispensation in the US is likely to impact global trade as well as geo-political situation.

2) Indian economy should witness a gradual recovery as both government spending and corporate spending picks up

3) Innovation led themes will get stronger.

We firmly believe that the journey of India from developing economy to developed economy has begun. One factor which is going to be at the Centre stage of this journey is Innovation.

We have identified 4 specific pockets of opportunity – Financialization, Industry 5.0, Retailization and Energy transition (F.I.R.E.).

Financialization. India has already taken a leadership position in adoption of digital payments. Increasing penetration of seamless digital financial solutions would lead to inclusive growth, higher productivity and better access to capital as well as investment opportunities.

Industry 5.0. We believe that next few years would truly underline the manufacturing renaissance for India. Global move to China +1 strategy in supply chain combined with growing domestic demand in India would mean that Indian manufacturing would gain global scale. Not only this, but we also expect that India would be at the forefront of defining new technology trends as software takes the Centre-stage across industries, where India has a head start of more than 3 decades now.

Retailization. Gen Z is expected to impact spending to the extent of US$1.8trillion by 2035. Technology is likely to play an important role in every aspect of consumption including what they buy and how they buy. We believe that space will go through tectonic change potentially leading to redistribution of market cap.

Energy transition. This is a global theme and is poised to change the energy landscape of India as well. Transition from traditional sources of fossil fuel (coal and crude oil) to renewable sources (Solar, wind and electric vehicles) is already opening significant investment opportunities in the entire value chain.

2025 global hawk’s eye:

From a global perspective, all eyes are on the tariff decisions from the Trump administration. India is least exposed to the tariff wars …. Nevertheless, tariffs would have an inflationary pressure in the US. This would imply that interest rates may not come off steeply. This is also reflected in the US 10-year yield, which is higher than the levels at the beginning of this year despite a 0.75 % rate reduction during the year. A combination of higher tariffs and higher US rates would mean that there would be a continued tendency for the US Dollar to appreciate. We would be looking out for signs of competitive depreciation of emerging market currencies. China’s move on the currency front would be noteworthy as the economy is vulnerable to exports shocks in an already slowing domestic demand.

Another expectation is the thawing of geo-political situations across the globe. This along with a strong dollar would mean that commodity prices including crude oil prices are likely to remain under check. This is certainly good news from India’s perspective.

India’s Amrit kal:

Coming to India, there have been some aspersions on the growth story given the subdued GDP growth numbers in the last two quarters. However, we note that government spending was impacted on account of national election in first quarter and monsoons in the second quarter. We expect a gradual recovery in spending and hence GDP growth from Q3FY25 onwards. We have maintained that 6-7% real GDP growth and 4-5% inflation translating into 10-12% nominal GDP growth is a sweet spot for India.

Finally, a word on valuations. Aggregate valuation for Indian market is in line with 10-year average and hence there is no broad-based exuberance. While there are pockets of overvaluation, we remain excited about multifarious opportunities across the market. Overall, we enter 2025 on an optimistic note where we believe that India would once again stand out as an economy and market which is least impacted by global uncertainties and indeed grow from strength to strength.

Source: AMFI, includes Growth/Equity Oriented Schemes, Hybrid Schemes, Solution Oriented Schemes, Index Funds, Other ETFs. Past performance may or may not be sustained in future and is not a guarantee of any future returns.

The sector(s)/stock(s) mentioned in this document do not constitute any recommendation of the same and Baroda BNP Paribas Mutual Fund may or may not have any future position in these sector(s)/stock(s).

Source: Internal, as on November 30, 2024

Source: BCG, data as on November 30, 2024

The views and investment tips expressed by experts are their own and are meant for informational purposes only and should not be construed as investment advice. Investors should check with their financial advisors before taking any investment decisions.

The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but Baroda BNP Paribas Asset Management India Private Limited (AMC) makes no representation that it is accurate or complete. The AMC has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. The AMC undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. Words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

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(The author is Chief Investment Officer Equity, Baroda BNP Paribas MF. Views expressed are personal and do not reflect the official position or policy of Outlook Media Group and/or its employees. The article is for information purpose only; please consult your financial planner/s before investing.)