Foreign portfolio investors (FPIs) sold a record ₹1,20,598 crore in 2024, making it the second-worst year for FPIs in a decade. This sharp reversal comes after a strong 2023, when FPIs were net buyers worth ₹1,32,648.25 crore. The shift in foreign fund flows highlights the growing challenges faced by Indian equities in 2024, marked by slowing corporate earnings, macroeconomic uncertainties, and weakening investor sentiment.
Market Performance in 2024: A Year of Contrasts
The Indian equity markets had a strong start in 2024, buoyed by optimism stemming from India’s robust GDP growth in the previous fiscal year and a pro-business environment following the re-election of the ruling party. However, the second half of the year saw a sharp turnaround.
The Nifty 50 and Sensex, which had rallied to all-time highs earlier in the year, corrected sharply after September 27, when a significant foreign sell-off began. The Nifty corrected by 10%, while the Sensex dropped 8.7%. Despite this, the benchmark indices managed to post gains of 8.8% and 8.17%, respectively, for the year—marking the ninth consecutive year of positive returns.
However, these gains were among the lowest compared to global peers. For perspective, while the Nifty’s annual gain of 8.8% may appear positive, it pales in comparison to the double-digit returns seen in developed markets like the U.S. or emerging markets like Brazil earlier in the year.
Decline in Foreign Investment
One of the defining features of 2024 was the exodus of foreign funds. FPIs turned into net sellers, offloading a record ₹1,20,598 crore worth of equities during the year. This massive outflow underscores growing concerns among foreign investors about India’s market valuation, slowing corporate earnings, and a challenging macroeconomic environment.
High valuations were a recurring theme throughout the year. Even after the market corrections, Indian equities continued to trade at premium levels compared to other emerging markets, raising concerns about their sustainability. Nifty earnings are projected to grow by just 10% in FY25, following three years of robust 18%+ growth. The combination of high valuations and moderating earnings growth made Indian equities less attractive to foreign investors.
The persistent weakness of the rupee also contributed to foreign outflows. The rupee declined for the seventh consecutive year, ending 2024 at 85.61/USD. Currency depreciation reduces the real returns on investments for FPIs, further discouraging foreign participation in the market.
Domestic Factors: Slowing GDP Growth and Inflation
India’s macroeconomic backdrop also played a significant role in shaping market trends. GDP growth slowed to 5.4% in the second quarter of FY25, down from 6.7% in the first quarter and 8.1% in the same quarter the previous year. This marked the lowest growth rate in almost two years, highlighting the challenges posed by weakening demand and a subdued global environment.
Urban consumption, a key driver of India’s economic growth, was particularly weak in 2024. Rising food prices and stubborn inflation eroded purchasing power, reducing discretionary spending. At the same time, private investment remained tepid, with growth in the manufacturing sector slowing to just 2% in the second quarter. This slowdown reflects the broader challenges faced by industries dealing with higher input costs and sluggish demand.
Persistent Market Challenges
Despite recent corrections, Indian equities remain expensive. The Nifty continues to trade at high valuations, even as earnings growth moderates. While markets rallied earlier in the year on optimism surrounding India’s long-term growth story, the rapid price increases have not been fully backed by fundamental improvements in earnings or macroeconomic conditions.
This disconnect between valuations and fundamentals poses risks, especially for retail investors who tend to enter the market during bullish phases. History shows that during market frenzies, retail investors often join late—when prices are near their peak—and exit early during corrections, locking in losses. This behavioral pattern has repeated itself time and again, leaving many retail investors vulnerable to market shifts.
The outlook for 2025 appears challenging, with analysts warning of the possibility of negative returns after nine consecutive years of gains. While the Indian economy retains strong long-term growth potential, near-term risks—such as high valuations, slowing GDP growth, and global uncertainties—cannot be ignored.
Investment Strategy for 2025: Focusing on Fundamentals
In this challenging market environment, it is crucial for investors to adopt a disciplined and informed approach to investing. Rapid price increases without solid fundamentals often lead to investor disappointment. Instead of chasing speculative trends, investors should focus on stocks with strong growth potential and reasonable valuations—commonly referred to as GARP (Growth at a Reasonable Price) stocks.
What Are GARP Stocks?
GARP stocks strike a balance between growth and value. These are companies with solid earnings growth potential but trading at reasonable valuation metrics, such as price-to-earnings (P/E) or price-to-book (P/B) ratios. GARP investing helps mitigate the risks associated with overpaying for high-growth stocks while ensuring exposure to quality businesses with strong fundamentals.
Why Focus on GARP Stocks?
During market consolidations, when volatility is high and speculative stocks are under pressure, GARP stocks tend to offer more stability. They provide a blend of capital preservation and growth potential, making them an ideal choice for long-term wealth creation. Additionally, GARP stocks are less likely to experience sharp corrections during downturns, reducing portfolio volatility.
Other Strategies to Consider in 2025:
1. Diversification: Given the risks associated with stretched valuations, investors should diversify their portfolios across asset classes such as equities, bonds, gold, and cash. Diversification can help mitigate the impact of market corrections and provide a buffer during uncertain times.
2. Hold Cash: Maintaining cash reserves is crucial during periods of volatility. Cash not only offers safety but also provides liquidity to take advantage of opportunities during market dips.
3. Invest in Defensive Sectors: Defensive sectors, such as consumer staples, healthcare, and utilities, tend to perform well during economic slowdowns. Allocating a portion of your portfolio to these sectors can provide stability in uncertain markets.
Opportunities Amidst Challenges
While the outlook for 2025 may seem daunting, it is important to remember that challenging periods often present opportunities for savvy investors. Market corrections provide a chance to invest in quality stocks at attractive prices. Additionally, long-term investors who stay disciplined and avoid panic selling are often rewarded when markets recover.
For example, during the COVID-19 pandemic in 2020, markets experienced sharp corrections, but those who stayed invested and continued to add to their portfolios during the downturn reaped significant rewards as markets rebounded in the following years.
Similarly, 2025 could present opportunities to invest in underappreciated sectors or stocks with strong fundamentals. By focusing on quality and adopting a long-term perspective, investors can navigate the current challenges and position themselves for future success.