2025: The Road Ahead

13th February 2025

Feb 13, 2025

Hello Dear Reader,

Grab a cup of coffee ☕ as this is going to be the longest post I have written yet.

“You can either read till the end or scroll down towards the end to know our comments on general trends in the securities market and broad-based comments given the current market sentiment.”

In 2008, the global financial system teetered on collapse. In 2020, COVID-19 erased $12 trillion from global markets. Yet amid these crises, investors with diversified portfolios—spanning gold, debt, domestic, and international equities—emerged battered but unbowed. Their secret? Asset allocation, the art of balancing risk and reward across uncorrelated assets. This isn’t just about survival; it’s about thriving in uncertainty.

The Core Four: How Each Asset Class Plays a Unique Role

1. Domestic (India) Equity 🇮🇳

By having exposure in domestic equities, one can capture growth opportunities in the Indian economy while diversifying across industries to mitigate sector-specific risks.

2. International (US) Equity 🇺🇸

The S&P 500 isn’t just a benchmark—it’s a hedge against local turbulence. With international equities, one can mitigate country-specific risks, but more importantly, benefit from Currency diversification.

3. Debt 🏦

Debt isn’t boring—it’s tactical. Debt doesn’t just give liquidity management but also overall risk of volatility of reduces. The Reserve Bank of India (RBI) is highly likely to cut interest rates further in 2025, building on its recent policy shift. On February 7, 2025, the RBI reduced the repo rate by 25 basis points (bps) to 6.25%, marking the first rate cut since May 2020. The central bank retained a neutral monetary policy stance to maintain flexibility amid global uncertainties but signaled a gradual pivot toward supporting economic growth as inflation moderates. We expect additional rate cuts of 50 bps in 2025, driven by easing inflation and a focus on growth.

4. Gold 🟨

Gold isn’t a “barbarous relic”— it has is a great diversification tool to reduce overall risk. Gold is also a good inflation shield.

S. Naren, Executive Director and Chief Investment Officer at ICICI Prudential Asset Management Company, recently shared key insights for investors as per his coverage by Mint.

Caution Against Overvalued Mid- and Small-Cap Stocks: Naren highlighted that mid- and small-cap stocks were highly overvalued, with valuations reaching levels not seen since 2007. He advised investors to avoid allocating funds to these segments at that time.
Recommendation for Systematic Investment Plans (SIPs): For those investing through SIPs, Naren suggested focusing on large-cap, flexi-cap, and hybrid funds instead of mid- and small-cap funds. This strategy was aimed at mitigating risks associated with overvalued segments.
Emphasis on Asset Allocation: He underscored the importance of a diversified asset allocation strategy, recommending a mix of equities, debt, real estate, global stocks, and precious metals like gold and silver to protect gains and manage risk effectively.
Observations on Market Dynamics: Naren noted that Foreign Institutional Investors (FIIs) had recently sold over ₹1 trillion worth of large-cap stocks, leading to a valuation disparity where large-caps became relatively more reasonably priced compared to mid- and small-caps.

Sandeep Tandon, the founder and Chief Thought Officer of Quant Mutual Fund, expresses optimism as per his coverage by Mint.

Investment Strategy:

Shift from Defensive to Aggressive: Tandon mentions moving from a defensive large-cap strategy to a more aggressive approach, focusing on select small and mid-cap stocks. This shift is part of Quant's strategy during market downturns or periods of pessimism, where they aim to build positions in high-potential areas.
High Beta Small Caps: He anticipates that when the market cycle turns, high-beta small-cap stocks will recover faster than the broader market, hence planning to tilt allocations towards these.
Tactical Shifts: Describes Quant MF's approach as opportunistic, ready to invest in sectors or stocks they previously might not have favored if conditions change.

Market Outlook:

Risk Management: In times of market downturns or risk-off periods, Quant MF shifts from high beta to low beta, from mid and small caps to large caps, and towards more liquid investments.
Historical Context: Tandon recounts past strategies during significant market events like the unknown risk from China in September 2024, indicating how Quant uses analytics to navigate such scenarios.

At Ayush Agrawal Research, we shifted our stance to prudent in September when we stopped being gung-ho on SMEs. We faced a lot of backlash and low renewals due to this but we are in it for the long run and we would rather lose clients than give out coverage when we see visible leading indicators of sentiment shift.

As early as December 2024, around 13% of stocks in the Indian stock exchanges were priced at a P/E of over 100.

If we move to a more recent comment, S Naren has mentioned “The best equity strategy today is not to put all your money into equities, especially mid-cap and small-cap stocks. SME IPOs and unlisted stocks are even riskier.”

If we move back to August 2024, the Regulator on its investor education and awareness website issued an advisory towards the SME segment.

Historically, MSME sector has been backbone of our growth. MSMEs contributed 29.7% to India’s GDP in 2017-18, increasing to 30.1% in 2022-23. MSMEs contributed 45.79% to India’s exports in May 2024. MSMEs are vital for employment generation and economic development. The sector plays a central role in India’s position as a global economic powerhouse by fostering innovation, generating employment, and enhancing export competitiveness.

However, SME IPOs grabbed headlines and regulatory intervention in 2024 for the wrong reasons. Not only this but a warning was issued in investor interest by the regulator as early as August 2024. (Link Here)

The regulator had to step in and introduce several measures to improve the integrity and investor protection in SME IPOs.

SMEs must show a profit of ₹1 crore in at least two of the last three financial years to qualify for listing.
SME promoters can only sell up to 20% of their shareholding, with a cap on selling 50% of individual holdings.
Promoters will face phased lock-in on shares exceeding the minimum contribution—half after one year, and the rest after two years.
A 21-day public review period for SME IPO draft documents has been mandated for transparency.
Up to 15% of the raised funds (or ₹10 crore) can be used for general corporate purposes, and funds cannot be used to repay loans from related parties.
A draw-of-lots system will replace the previous proportionate allotment to ensure fairer share distribution.
The norms for related-party transactions will now be aligned with those applicable to mainboard listed entities, with a materiality threshold of 10% of turnover or ₹50 crore.

But why was this?

Many companies allocate large portions of IPO proceeds to "General Corporate Purposes" (GCP) without sufficient monitoring.
Some SME IPOs serve as an exit strategy for promoters. In 2023-24, 52 IPOs featured an Offer for Sale (OFS) component, with 30 having more than 20% of the issue size dedicated to OFS.
SMEs are exempt from stringent Listing Obligations and Disclosure Requirements (LODR), which can impact stakeholder accountability.
While initial regulatory leniency facilitated rapid SME listings, rapid growth has exposed vulnerabilities in governance, operations, and compliance.
SME platforms suffer from low liquidity and high impact costs.

As the current market cycle progresses, regulatory interventions are expected to further strengthen the SME landscape and improve listing standards.

We took an executive decision in September that we would be covering multi-caps and and doing limited SMEs even if it meant losing 90% of our client base which costed us because at that time, the party was in full swing and DJ was playing Saat Samundar Paar.

Even after this consolidation, we felt a need for a multi-asset offering.

This is why, I feel happy and humbled to announce that I have launched my second model portfolio basket, the AARD Multi-Asset Model Basket.

With this, I hope to bridge prudence and opportunism. We made our first model portfolio in September 2024, The Bharat Nxt 25, which is 100% equity allocation and we are happy with the existing allocation in that strategy.

Through our AARD Multi-Asset Model Basket, we are taking exposure to domestic domestic equity, debt, gold and international equity.

FACTSHEET

With the launch of this basket, our model portfolio offerings would now be complete with one equity focused strategy and one diversified asset strategy.

Know More

Indian equities faced turbulence due to multiple factors over last couple of months. As I write this blog, Foreign Institutional Investors (FIIs) have sold ~₹2,86,875.98 crores since October 2024. FII Equity Assets Under Custody (AUC) fell to ₹67.7 lakh crore as of end-January 2025, down 5% from ₹71.1 lakh crore in December 2024. Currency depreciation often triggers FIIs to repatriate funds to avoid losses from exchange rate fluctuations. For instance, a weaker rupee reduces the dollar-denominated returns for FIIs. FII selling exacerbates devaluation.

The Q2 earnings across the board were not pleasant to put it lightly and the Q3 earnings are slightly significantly better.

INR (Indian Rupee) weakened to 87.43 INR/USD (Feb 7, 2025) amid cyclical slowdown and FII outflows.

The Indian market’s resilience hinges on domestic liquidity and structural reforms, but global headwinds demand caution.

As per recent PIB Press Release,

India’s real GDP is expected to grow at 6.4% in FY25 and 10.1% in FY26.

RBI projects inflation at 4.6% in Q1 and 4.0% in Q2 of FY26

There is a broad consensus on the street that USD/INR could further devalue in 2025. Rising crude demand could pressure India’s import bill, weakening INR. US-China/Mexico tariffs risk spillover effects on EM currencies, including INR. Sustained equity selloffs ~₹2,86,875.98 crores since October 2024 can exacerbates devaluation.

We see three scenarios at the current juncture for Q1FY26.

Case I: If domestic reforms (e.g., infrastructure spending, tax cuts) offset global headwinds, we could experience a change in broader market trend driven by earnings recovery and DII inflows. The correlation between SMEs index and Smallcaps is roughly ~65%. A broader market trend would accordingly take place.

Case II: Prolonged USD strength could trigger FII exodus, pushing INR to 90/USD, though DII resilience would still limit the pain. A weaker INR increases the cost of imports, contributing to higher inflation. This can erode consumer purchasing power and affect overall economic stability.

Case III: Moderate volatility, as domestic growth (6.7% GDP) counterbalances external risks. This can be led by tax reliefs and rural demand revival, PLI-driven exports and FDI inflows and SIP inflows.

The Q1 FY26 GDP growth projection of 6.7% aligns with the Case I and Case III, but may be overly optimistic in Case II, where external challenges could impact growth. The combination of a strong U.S. dollar, FII outflows, and the resulting depreciation of the INR could pose significant challenges.

Disclosure: The above are comments on general trends in the securities market and broad-based comments which does not include security specific data and should not be construed as a research report or recommendation to Buy/ Sell.

How we have aligned ourself?

We are no longer taking fresh subscription in any offering where we offered SMEs and only accepting renewals for time being.
We have no major intermediate changes to make in our Bharat Nxt 25 strategy.
We have launched a Multi-Asset offering.

“One doesn't need courage, only the wisdom to survive through the cycles of life.”

Rgds,

Ayush Agrawal

Disclaimer

All information is sourced from publicly available data, and while every effort has been made to ensure the accuracy and reliability of the information provided in these notes from the management meeting, Ayush Agarwal Research cannot guarantee that the information is complete or free from errors.

I, Ayush Agrawal, am registered with SEBI as an Individual Research Analyst under the registration number INH000013013, effective from September 14, 2023.
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