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Smallcap funds experienced outflows for the first time in two and a half years primarily due to regulatory concerns raised by Sebi on small and midcap stocks and directing mutual funds to run stress tests on their small and midcap fund portfolios in March. Additionally, March often sees higher outflows on account of financial year end and advance tax. This can be viewed as an aberration, and inflows are expected to resume.
Market Dynamics in FY25
India’s economic landscape presents promising growth opportunities compared to other economies, leading to unprecedented highs in benchmark indices. The market dynamics in the short term are likely to be influenced by electoral outcomes, upcoming earnings season, and potential rate cuts. With robust economic conditions, including low inflation, controlled current account deficit, commitment to fiscal prudence, and currency stability, the overall market returns may experience moderation.
Earnings Growth vs. Valuations
Although valuations for midcap and smallcap stocks have surpassed long-term averages, earnings growth has not been synchronized. However, there have been notable earnings upgrades in small caps and midcaps, some of which are already reflected in their valuations, with market flows ahead of earnings due to increased investor appetite for these funds.
Inflows into Debt Segment
Following India’s inclusion in global bond indices starting June 2024, significant inflows into debt are anticipated. While these inflows will be phased, the markets have already begun experiencing capital flows in anticipation. Equities may witness volatility and consolidation periods amid substantial rally in benchmark indices, with equity inflows hinging on resilient macros and FPI interest.
Capital Flows and FPIs in FY25
The flow picture for FY25 is expected to continue with capital inflows into equities from FPIs, DIIs, and retail investors. Political continuity could drive FPI flows, enhancing FPI ownership in Indian equities over time. With a positive economic outlook, foreign flows are expected to improve post-elections, supported by central bank policy rate cuts.
Sectoral Opportunities with Lower Interest Rates
Lower interest rates are poised to benefit interest rate sensitive sectors like financials, autos, and real estate. Capex-driven segments such as infrastructure, manufacturing, and utilities are expected to gain, along with sectors like power, defence, and transportation supported by government policies. Portfolios are positioned accordingly with overweight exposure to these segments.
Potential Risks for Investors
Investors should be aware of potential risks including upcoming elections, global economic downturn, and rising crude oil prices. Market volatility could result from a shift in leadership during elections, although the market may have already factored in certain outcomes. Monitor external factors and adapt investment strategies accordingly.
Exploring Other Asset Classes
Investors should consider a well-rounded approach aligning with their risk tolerance and investment horizon. Equities offer long-term wealth generation potential, while debt instruments can help mitigate volatility. Allocating a portion of the portfolio to hybrid funds and index funds can provide diversification and risk management benefits.
Hot Take: Embracing Market Dynamics in FY25
As we navigate through FY25, it is crucial to stay attuned to evolving market dynamics and economic indicators. With promising growth prospects in India and global markets, investors must remain vigilant of potential risks and opportunities. By diversifying portfolios across asset classes and sectors, investors can optimize returns and manage volatility effectively in a dynamic market environment.
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