Market Strategy: Overweight on banks, IT, selective in small, midcaps; Zomato, ICICI Bank among top picks: Motilal Oswal

The Indian stock market is set to conclude calendar year 2024 on a strong footing, with benchmark indices Sensex and Nifty 50 delivering over 8% year-to-date (YTD) returns, marking their ninth consecutive year of gains.

However, the markets have experienced a sharp correction of approximately 11% over the past two months, retreating from their record highs. This decline has been primarily driven by unprecedented selling activity by Foreign Institutional Investors (FIIs), who offloaded more than ₹1.5 lakh crore in October and November — the highest-ever two-month outflow on record.

According to a note by Motilal Oswal Wealth Management, several factors contributed to the heavy FII outflows, including moderating corporate earnings, elevated valuations in mid-cap and small-cap stocks, and a strengthening dollar index following Donald Trump’s victory in the US Presidential Elections. These elements prompted FIIs to reallocate funds away from Indian markets.

Looking ahead to 2025, the Indian equity markets are expected to navigate a complex interplay of global and domestic economic factors. The Reserve Bank of India’s (RBI) anticipated rate cut in February 2025, coupled with the continuation of U.S. interest rate cuts, and potential trade policy shifts under Donald Trump’s presidency, set to commence in January 2025, are likely to drive market volatility.

The Union Budget, scheduled for February 2025, will also play a critical role in shaping market sentiment. Given the fragile global economic environment and mixed macroeconomic conditions in India, markets are expected to remain in a consolidation phase in the near term, as per Motilal Oswal Wealth Management.

Stock Market Outlook for 2025

After a subdued earnings performance in the first half of FY25, Motilal Oswal Wealth Management expects earnings to recover in H2, driven by increased rural spending, a buoyant wedding season, and pickup in government spending.

“We further expect earnings to gain momentum, delivering a 16% CAGR over FY25-27E. Moreover, the recent market correction and the moderation in valuations offer an opportunity to add selective bottom-up stock ideas. We remain optimistic about the long-term trend, given the strength of corporate India’s balance sheets and the prospects for robust, profitable growth,” it said in a report.

Stock Market Strategy

The latest correction in Indian stock markets has cooled off valuations in large-caps, even as mid- and small-caps continue to trade at premium to their historical averages, according to Motilal Oswal Wealth Management. In the near term, it suggests investors maintain an overweight position in large-cap stocks while selectively allocating to mid and small-cap stocks.

It is ‘Overweight’ on IT, Healthcare, BFSI, Consumer Discretionary, Industrials, Real Estate, and niche themes like Capital Market, EMS, Digital e-comm, hotels. It remains ‘Underweight’ on Metals, Energy, and Automobiles.

BFSI: The BFSI sector is well-positioned to navigate the current uncertainties. The expected repo rate cuts in Q1CY25 should further enhance profitability. The Capital Markets theme remains constructive, driven by the rise in retail participation, surge in demat accounts, and the ongoing financialization and digitization of savings, Motilal Oswal Wealth Management said.

IT: After two years of depressed technology spending, the US tech sector is likely to see a recovery under President Trump’s new regime, coupled with continued rate cuts. According to Motilal Oswal Wealth Management, this trend should be beneficial for the Indian IT sector. Companies specializing in AI, automation, and cloud services are well-positioned to benefit from a revival in the global tech spending cycle, it added.

Consumer Discretionary: The sector stands to benefit from rapid shifts in consumer purchasing behavior, with a transition from unorganized/local to organized retail channels. Companies catering to this shift should perform well, it said.

Industrials: India is poised to lead the global digital infrastructure space, with e-retail penetration expected to hit 10% by 2027. Motilal Oswal Wealth Management believes companies with strong next-generation technology capabilities are better positioned for future success.

It said that the government’s initiatives to promote component manufacturing and localization should provide a boost to fast-growing industrial segments, such as data centers, transmission, electronics, and EMS, driving increased order inflows for capital goods companies.

Top Stock Picks

Motilal Oswal Wealth Management has listed out its top stock picks. These stocks to buy include ICICI Bank, HCL Technologies, L&T, Zomato, Nippon Life India Asset Management, Mankind Pharma, Lemon Tree Hotels, Polycab India, Macrotech Developers, Syrma SGS Technology.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.