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India Market 2025 Outlook
While the macro environment has become more challenging for emerging markets, including India post the US election, we believe Indian equities should remain relatively insulated from the macro headwinds of a stronger dollar and the US tariffs risks.
India is still largely domestic demand driven economy with consumption contributing nearly two-thirds of GDP, and an investment upcycle is expected to continue over the next several years. The US contributes only 10-15% of India’s exports, primarily in IT services and Pharmaceuticals, which may have a limited impact from the tariff risks. On the other hand, we believe India may benefit from the current geopolitical situation as well as from multinationals’ “China + 1” strategies as India is now in a much better position than in previous years to attract more investments and thus gain more shares in global manufacturing industries. We believe investing in sector leaders will be a good strategy to navigate macro uncertainties while capitalising on India’s structural growth story.
We believe “Trump 2.0” administration may bring more opportunities than risks to India, as the country is now much better prepared to attract more investments from multinational companies’ reshuffling their supply chain. This preparedness is supported by better infrastructure, supportive government policies, and a growing base of affordable consumers, which creates a large consumption market. Companies like L’Oreal and Schneider Electric have already held their global analyst meetings in India in 2024, and we expect more companies to follow in coming years. Despite India was not a primary beneficiary of the previous US trade tensions, much has changed since then. We expect India to receive more foreign direct investment (FDI) not only in high-tech sectors but also in mid-tech sectors like textiles and small electrical goods, which tend to be more labour-intensive by nature and are crucial for job creation. The “Make in India” initiative has been one of the key priorities for the Modi government over the past decade, and after the government regained strong leadership post the Maharashtra state elections, we expect the Central government may continue to undertake various reforms to achieve its “Make in India” goal.
We see the current economic slowdown as transitory and expect growth to rebound in 2025. Government capex has slowed in 1HFY25, largely due to national elections, disruptive weather, and seasonal factors. However, we have witnessed government spending picking up in 3QFY25, which will continue in coming quarters. In addition, the housing cycle remains strong with a low level of inventories.
More importantly, private capex is expected to take the baton from the government moving forward. Private corporate capex is expected to increase considering strong balance sheets and opportunities in various sectors including power, electrification, Production Linked Incentive (PLI) schemes etc. We have also seen an increase in bank-approved projects, which should soon translate into private corporate investments, leading to a better earnings cycle.
Consumption growth has also slowed in recent quarters, particularly in urban mass consumption, which has experienced a cyclical downturn due to high food inflation and a slowdown in unsecured consumer credit after Reserve Bank of India (RBI) pre-emptively tightened credit growth, especially on unsecured consumer loans since late 2023. We expect credit growth to stabilise from here as it has now come down to similar level of deposit growth. Furthermore, RBI is shifting to an easing monetary cycle, with interest rates likely to be cut in 1QCY25.
While we are closely watching out for food inflation, we expect a generally stable inflation environment for 2025 on the back of benign oil prices. Meanwhile, rural consumption has remained resilient and continues to show gradual improvement. In addition, premium consumption among affluent Indians - such as travel, luxury hotels, private hospitals and premium properties - has shown solid demand. Thus, we prefer to stick with consumer services where demand remains strong for the time being, as we navigate the cyclical slowdown in mass consumption.
While we expect some headwinds from the global macro environment, we believe India’s structural growth story remains intact and is expected to be one of the fastest-growing economies in 2025. Thus, we believe investing in sector leaders with strong management teams will be the best way to navigate tough times amid increased uncertainties while capitalizing on potential growth opportunities. Furthermore, we prefer to focus on sectors with strong demand, such as travel, internet/quick commerce, power, and hospitals, which offer high earnings visibility.
February 05, 2025
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Authors: Sol Ahn (Licensed by the Securities and Futures Commission for Types 4 and 9 regulated activities under the Securities and Futures Ordinance), the author and her associate(s) do not hold the securities/fund mentioned in the article.
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