Outlook 2025

Summary of 2024

?In 2024, equity investments showed an average performance with the benchmark Nifty returning close to 9%, followed by the Nifty 500 which returned close to 15%. Midcap and smallcap stocks gained over 23% in the calendar year 2024. The benchmark Nifty is the best performing index in the last three years but one of the worst performing indices in the world in 2024 after the KOSPI, CAC40 and FTSE100.

Within the Nifty500, which is a broad market index covering 95% of the total market capitalization of Indian equities, about 60% of the companies underperformed the indices and 70% of the companies did not outperform the midcaps, while the Nifty500 constituents include all midcaps. Around 25 companies returned over 100% in 2024, out of which 3 are part of my managed portfolio including BSE Ltd which ranked 12th in 2024. Out of the 38 companies I have invested in, 7 companies are still trading below the invested value and 4 companies are generating returns below the benchmark index. My cumulative return for 2024 is 30%.

Compared to the pre-Covid era, the average CAGR growth of the last 5 years is 14%, eclipsing the long-term growth of the last 10 years, which is 11%, and the average CAGR growth of the last 15 years, which is 10.67%.

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Outlook for 2025

In 2024, parliamentary elections have taken place in all major countries, including India, the US and some European countries, the United States and the UK have replaced the current leadership, and in India, political power has not changed but has lost some strength and reliance on coalitions has increased as the largest party did not win a majority in the parliamentary elections.

Geographically, the South Asian region is currently the third most unstable place in the world. Burma and Sri Lanka were already politically unstable, with Bangladesh and Pakistan joining them. Virtually most of the countries bordering India are politically unstable, which is a major problem for India.

Donald Trump has been elected the 47th President of the United States. This time he has more power than in the previous term as he has a majority in both houses. The President-elect has already made his intention and priority "America First" clear and will not hesitate to impose import tariffs if other countries prevent American companies from doing business. Indian exports to the US account for about 50% of total exports, while American exports to India account for only 3% of total exports. India has a trade surplus only with the United States and the United Kingdom. If the new President of the United States ignores the personal relations with the Indian Prime Minister and tries to balance the trade deficit with India, it can be a big problem for India as most of the investments and foreign exchange coming into India are from the US.

Indian equity markets have never seen negative returns since 2011, with the exception of 2015 when Indian markets ended the calendar year with a negative return of 4, which is the longest bull run in the history of Indian equity markets.

2025 could be a year of negative returns for Indian equities as many challenges are consolidating and could activate at any time. The slowing economy and rising inflation are a contradictory scenario that cannot be ignored as it directly reflects the purchasing power or unemployment situation.

Currently, the Indian market is trading at 22 times earnings, while the US market is trading at 30 times earnings. The Indian markets are down about 10% from their highs, while the US markets are within 5% of their highs. Indian markets are fairly valued compared to other equity markets, but FPI inflows in 2024 are negligible while FII sales in the last four years and 2024 are the highest in history. This is a scary situation as institutions that have always preferred to buy Indian equities at high valuations are now pulling out even at attractive valuations.

I expect commodities, PSUs and new edge companies to be the worst performing sectors in 2025. Auto components, healthcare and pharma will be in the limelight and will play an important role in supporting the economy, while energy companies may remain neutral and stay on the sidelines after some consolidation. Banks and NBFCs, which are an integral part of the economy, could come under pressure. The performance of key technology companies will depend on the US measures to settle the trade deficit as a large part of the revenue comes from the US markets. Innovative ideas could lead the next rally. Infrastructure sector growth will depend primarily on government spending, but the government's main task is to control the budget deficit without increasing the tax burden.

During the 2020 COVID period, central banks around the world opened their treasuries to support the economy, resulting in excess liquidity and better than expected investment performance. However, after normality returned, inflation began to rise in mid-2021 and accelerated in 2022, prompting central banks to take damage control measures and dramatically raise interest rates in 2022 and 2023. The US Federal Reserve also announced quantitative tightening (QT) of 90 billion dollars per month to absorb liquidity. After 24 months of quantitative tightening and a rapid rise in the interest rate cycle, the Fed and other developed countries nominally lowered interest rates, adjusting rather than supporting the economy, as they are doing well and do not need Fed support. Any rate cut below 4% in the US is perceived as an alarm signal in the economy.

I expect 2025 to be a year of contraction (negative) for investors. It offers the opportunity to buy good investments at reasonable prices, paving the way for the next golden period in the investment era. This year offers favorable options to achieve high returns on the proposed investments.

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Investment philosophy

As I understand it, the world economy is based on the flow of money and its circulation on the basis of the income earned. This is a basic principle of the modern economy. However, some find this statement contradictory because the real return (dividend) on equity investments is often lower than that of fixed income instruments, even though the returns on equity investments exceed those of all other asset classes. Prior to the 1990s, the dividend yield of the benchmark Sensex index was over 10%. This fell to 3% at its peak in January 2008 and then dropped to around 6% at the Sensex's low in the same year. Since then, it has fallen steadily and is currently around 1.25%, which is well below deposit rates. I do not think people or investors consider unrealized gains from equities (the rising value of equity investments) as returns or profits as they can enjoy them only after liquidation. There is no logic in liquidating assets because no one can stay rich just by liquidating assets.

So why do intelligent people opt for equity investments to create wealth?

The logic is simple: they think of the future dividends on current investments, which are unique compared to other asset classes. With fixed income securities, the dividend yield tends to be stable or downward trending, while with equities it tends to be upward trending. For example, if the same amount is invested for the same period of time, the maturity yields of fixed income instruments are defined and fixed. In contrast, the maturity yields of equity investments depend on the performance of the company. For example, consider company XYZ with a current share price of $100 and a dividend yield of 2%. If the company grows at a CAGR of 10% for 10 years, the share price would be around $260 and earn around $5.2 with the same dividend yield. This represents a 5.2% return on the original investment, a privilege not available with fixed income instruments.

My investment philosophy focuses on income from equity investments and on increasing the value of the investment. My aim is to achieve a dividend of at least 25% on the invested value after 10 years. This philosophy protects me from short-term volatility and offers the opportunity to achieve higher returns in depressed years. My main focus is on real returns and not on share price fluctuations, as I firmly believe that such fluctuations have no impact on a company's day-to-day operations or productivity.

Investment strategy

1) Identifying investments: - I am a firm believer that fluctuations in stock ownership start much earlier than good or bad news becomes known. Therefore, tracking stock holding patterns is crucial for identifying new investment ideas or managing existing investments.

2) Fundamental analysis: - After filtering the shareholding patterns to identify new investment ideas, the fundamental stability of the company such as cash flow, margins, growth or capex is examined.

3) Understanding the business model and future growth: - Once the new idea has passed the initial fundamental analysis parameters, further analysis is carried out to understand the business model and identify the company's potential future growth.

4) Risk analysis: - Once the business model and future growth projections align with our investment philosophy, I analyze the regulatory pros and cons for the company and then assess the worst-case risk of the identified idea.

5) Investment management: - Once I am convinced to invest, I take the initial position and follow the above points on a weekly, monthly or quarterly basis. Increasing or decreasing the investment depends on the performance of the business.