Equity Supply To Limit Market Returns, Nifty Target Set At 26,600: Jefferies' 2025 Outlook

As India enters the fifth year of its investment upcycle, expectations for equity returns in 2025 are set to moderate, with the supply of equity hitting new highs, capping potential gains. Despite strong domestic equity flows and continued economic growth, Jefferies' outlook for the Nifty remains subdued, with a target of 26,600 by December 2025, implying a 10% return.

The Indian economy is expected to maintain a growth rate of 6.5-7% in 2025, supported by continued capex investments, particularly in housing, infrastructure, and private corporate capital expenditure. However, despite the sustained investment momentum, growth in corporate earnings is expected to slow down. After a period of strong earnings growth from financial year 2021 to financial year 2024, EPS growth has slowed to less than 10% for financial year 2025. Jefferies predicts a recovery in earnings growth to 13% in financial year 2026, as the impact of fiscal consolidation and regulatory-driven credit growth slowdown fades.

The slowdown in economic activity in 2024, caused by a combination of national elections and disruptive weather patterns, is expected to reverse by the first half of 2025. With a pick-up in government spending and improved liquidity, GDP growth is anticipated to accelerate, benefiting corporate earnings in the process.

Despite this, the Indian equity market faces challenges from rising equity supply. Domestic equity flows have remained strong, with domestic investors contributing about $100 billion annually. However, supply has surged to record levels, with an estimated $60 billion in equity issuance in 2024. This increase in supply, driven by large IPOs and block deals, has dampened the market's ability to sustain upward momentum. Jefferies expects this high supply to continue, unless there is a market correction.

Valuations for the Nifty index are currently above their five-year average, with a forward price-to-earnings ratio of 20.5 times, suggesting limited upside potential. While rate cuts by the Reserve Bank of India are expected in the near term, the market is likely to grow at a pace in line with earnings growth, which Jefferies projects to be 10% for the year.

Given this cautious outlook, Jefferies favours large-cap stocks, particularly in sectors expected to deliver stable earnings growth. Key sectors include banks, telecoms, two-wheelers, healthcare, real estate, and power. Within these, banks remain a top pick, with growth expected to gradually pick up.

Jefferies' high-conviction stock picks for 2025 include ICICI Bank Ltd., Axis Bank Ltd., Bharti Airtel Ltd., JSW Energy Ltd., TVS Motor Co., Coal India Ltd., Godrej Properties Ltd., and Sun Pharma.