Equity Market Insights:
The equity markets had another positive year in 2024 with Sensex recording an 8.84% increase, marking the ninth consecutive year of growth in India. However, the recent quarter ending 31st Dec 2024 saw heightened volatility owing to several global and Indian factors causing Sensex to fall by 7.27% and triggering a broad sell-off across sectors. Except for the BSE IT index, all other major sectoral indices were in red.
As we look back at the quarter, we note the biggest reason for the downturn was the disappointment seen in the corporate earnings season. The earnings grew by just 1.8% in Q2FY25 for the Nifty 50 companies. The FY25 earnings growth estimate has been reduced to ~5% now, the lowest since FY 2020. Other India-specific data on persistent inflation, slowing consumption demand and decelerating GDP growth also contributed to the fall.
External factors included heavy selling by FIIs – redirecting investments toward China and even back to the US. This created a temporary nosedive, with indices dropping 9-10% at their worst points.
As we turn to the new year, we strongly believe that the staggering returns witnessed in recent years are not likely to be repeated at the same pace. Going forward returns will be more measured and driven by a revival in government capex & execution timelines, geopolitical uncertainty, a pickup in corporate earnings especially in the second half of 2025 and Trump administration policies.
The US markets performed strongly in 2024 with the S&P 500 closing 24.5% up, buoyed by the tech sector’s focus on AI-based themes. However, large-scale investments in AI carry risks. If these projects fail to deliver the expected ROI within projected timelines, we could witness severe corrections in global markets, potentially impacting Indian markets as well.
India remains a promising destination for long-term wealth growth, despite near-term challenges. We are also sticking to a long-term sustainable strategy by focusing on value large-cap funds to deliver steady returns. Overall, we maintain our underweight position to equity (check the asset allocation below) on the back of pricey markets- the current PE ratio of 22.7x is still above its historical averages.
Keeping away from mid & small cap schemes, sectoral funds and NFOs is highly recommended. If you seek excitement from your investment portfolio, you are doing it wrong. Do read our blog here to know more!
Most of our portfolios include a small allocation to Chinese markets. A tactical decision from over a year ago when we observed a multi-decade low valuation is now paying off. For the full year of 2024, the benchmark Shanghai Composite Index rose by 12.67% after the Chinese government announced significant economic support measures.
Debt Market Insights:
It’s a rare sight to see the Fed cutting the interest rates by 100bps and the 10Y Treasury yields rising by an equal margin of 100bps! Since the Fed began cutting rates in September, the yield on the 10-year note has risen from 3.622% to 4.691%.
Traditionally, rate cuts lead to lower Treasury yields, but this time, we’ve witnessed a divergence from the norm. What’s causing this?
Recessionary fears had kept the US market under its grip for long. The Fed’s rate cuts aim to stimulate economic growth by making borrowing more affordable for businesses and individuals. However, several factors have shifted market expectations. Predominantly there are inflationary concerns stemming from Trump’s policies including tariffs. The high expected inflation also feeds into higher expected yields for buyers of US government securities. The US government needs to issue more debt to fund its higher fiscal deficit. However, given the already high debt levels, new issuances must offer higher yields as investors demand compensation for risk and uncertainty. Lastly, the Fed recently indicated a slower rate-cut trajectory, citing a stronger-than-expected economy. All these aspects have led to the rise in the yields in the bond markets.
The dynamics also show the complexities of modern financial systems where traditional monetary policy effects may not hold and how quickly narratives can shift in a quarter.
RBI is in a difficult spot and faces a balancing act. While retail inflation has eased, food inflation remains a concern. As of December 2024, inflation stands at 5.22% (below consensus expectations). Additionally, to keep INR in check, the RBI’s decisions are influenced by global rate trends. We maintain caution with respect to the interest rate outlook. Even though the market is factoring in the first rate cut of 25 bps in early 2025, further rate cuts could be difficult as we anticipate an upside risk in the inflationary environment going forward in India.
For our debt allocation, we continue to prefer a portfolio duration of up to 1.5 years. Allocation to longer-duration securities should be avoided as the risk-reward ratio is not favorable as compared to shorter-duration ones. For instance, the yield on a 1-year Indian G-Sec is 6.67% while the 10-year is only 10bps up at 6.77%. For short-term cash management, arbitrage funds offer better tax-adjusted returns. However, owing to volatility in arbitrage funds in a sharp market correction, the portfolio should be balanced with ultra-short-term debt funds.
Other Asset Classes:
Staying on course with our expectations, Gold performed exceptionally well in 2024, delivering 21% returns in the last one year and 0.76% return in Q3 FY25. Gold continues to be represented in all our client portfolios with an allocation of 10-20% depending upon risk profile and equity exposure. It should remain a classic portfolio insurance case in 2025. During a high inflation and low interest rates environment, the real interest rates drop making gold a valuable asset. The shifting world orders emanating from policy decisions, geopolitical tensions and de-dollarization is expected to keep gold in demand.
In 2024, housing prices in the top seven cities increased by 30%, with Delhi-NCR experiencing the most significant increase. Despite a 4% decline in sales volume and slower approvals for new projects, which constrained housing supply, the overall sales value rose by 16%. The luxury housing segment continued to thrive, supported by high-net-worth individuals seeking premium properties. It’s important to note that the real estate market follows its own cycles and we may be at the end of the up-cycle. We recommend allocating no more than 20-25% of your total portfolio to such illiquid
investments.
Amid the current global economic uncertainties and inflated valuations of fundamentally strong assets, we advise diversifying your portfolio across asset classes and geographies. This approach helps mitigate concentration risk and cushions against sharp declines in portfolio values.
Truemind’s Model Portfolio – Current Asset Allocation
Personal Finance Capsule:
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Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
