Jay Thakkar on 3 sectors to watch out for in 2025

"There was an exceptional calendar year 2021 wherein FII sold off around 54,000 crores in secondary market and despite that market delivered 22% returns," says Jay Thakkar, ICICI Securities.

I want to address the report that you have come out with at ICICI Securities. Give us a sense of this interesting report that you have published and also tell us if you would expect equity participation to remain upbeat going ahead as it has this year. We have seen some very solid SIP moves also coming in, some very strong data to support the retail participation that we have seen in the equity markets. Do you expect this to continue or even improve in the year 2025?
Jay Thakkar: As far as the kind of report which we have released this year, we have analysed various parameters wherein we have checked in where the FII flows have been and how markets react to the FII flows and DII flows as well as the prop or the retail flow, so that is a very important part as far as the market liquidity is concerned and interestingly what we have found out is that if we check from calendar year 2017 until 2024, so we have checked until the data until November 24, interestingly what we have found is that whenever there has been a negative flow by the FII as far as the secondary market is concerned, generally markets give the returns of almost 2-3-4%.

It does not provide the returns in double digits. There was an exceptional calendar year 2021 wherein FII sold off around 54,000 crores in secondary market and despite that market delivered 22% returns.

Else if you check the returns are always good in Indian markets, equity markets, in double digits whenever the FII flows have been positive, so that is one interesting data and this time around we saw that FII sold more than one lakh crore almost to the tune of 1.5 lakh crore and Nifty delivered returns in single digits almost by 9%, so that is one important point.

But then what is interesting is, we found out that if we check since COVID, since 2020, is that the participation of the retail or the domestic institution have really increased.

So, now if you check the DIIs holding in the Indian equities is almost 38% and FIIs holding in Indian equities has dropped down to approximately 16%. So, more than double is what DIIs are holding right now in Indian equities and the major reason for that is the SIP flow as you rightly mentioned.

I mean, now we have seen that almost five crore unique investors are coming through the mutual fund investments in India and interestingly we have clocked the figure of 25,000 crores SIP per month, so that amounts to almost three lakh crores per annum.

So, the DIIs investment in calendar year 24 has been four lakh crores as against the exit of FII from the secondary market of 1.5 lakh crores. Hence, the markets have not corrected much. If we go a decade back and if this kind of an FII outflow would have been there, then market would have corrected even more.

And as far as broader markets are concerned, this time around if you see whenever Nifty corrects 10-12%, the broader markets, generally the mid and smallcap indices correct by 20-25%.

This time it outperformed the frontline indices, did not fall much, and that was due to the retail participation and this kind of SIP flows that is coming out. We have also interestingly found out that retail investor direct equity investment has been 1.25 lakh crores in calendar year 2024. So, there you see that the FII figure has almost been meted by DII flow as well as retail flow directly, indirectly and I think that this flow is likely to continue going forward in 2025 as well.

In fact, we have interestingly studied the data of US. So, if you go and check the US data because generally the Indian financial markets are replicating the US going forward in the long term, so 1980 to 2000 period for the US markets wherein the household holdings as far as US equities were concerned almost by 39% to 40%.

It went from 10% to 40%. Indian household holdings as far as Indian equity market is concerned, it has rose now to 29% and we have the strong demat accounts as well, I mean 17 crore unique demat accounts now in India, so that has now gone to 29% and we expect this to move to 40 or maybe beyond that 40-45% as well, so there is much more room, much more liquidity flow likely to happen in India and where is this flow going actually?

So, what you have seen is in calendar year 21 if you see, the amount that comes from retail or mutual fund directly, indirectly into the Indian equities the mid and smallcap indices.

The difference between large and mid and smallcap there in the broader markets the participation of the flow was 10% higher than the largecaps.

From 10% to 2024 it has gone by 100%. So, the amount which has been invested in mid and smallcap has been 100% more than the largecaps. Hence you have seen the flows coming more in flexicap, followed by the sectoral or the thematic funds and thereafter if you go and check mid and smallcap, last is the largecap.

So, the flow out there in the broader markets is huge, the retail participation has increased and the kind of journey which we had seen of the US equity, the household participation, if that continues here, I think going forward too we would see much more flow coming in India and that will help the markets to in fact move to high levels in coming years as well.

That is an interesting analysis as to how US really panned out and how India is likely to perhaps follow suit but that all boils down to what we are expecting from next year with respect to Nifty. A lot of participants believe on the fundamental side that there is no major upside, we are not likely to scale maybe the fresh highs in a hurry. What is your own prognosis for 2025? What is the level to watch out for?
Jay Thakkar: Well, for calendar year 2025 we have a target of 27,500 on Nifty and quantitatively if we see the dynamics of markets have actually changed from 2020 lows wherein I just mentioned that the participation has increased by the retail traders, the flows are going into the mid and smallcap, the broader markets have rallied quite a lot.

So, keeping all of this in mind what we have also interestingly found out is that the markets are generally following the mean reversion technique quantitatively and on the lower side it deviates from the mean by around 1 to 1.5 sigma.

So, the lower end for the markets or for the Nifty the support is likely at around 21,800 to 22,000 levels which is around 2,000 points from here on I mean that is the crucial support and markets deviate by three sigma on the upside and that trend has been continuing since COVID and with this kind of a flow we believe that the participation or the support at the lower levels will be there and the three sigma target on the upside for the Nifty comes to around 27,500 for calendar year 25.

A quick call as far as the sectoral trends are concerned and if you had to name let us say one top recommendation for 2025 both in terms of sectors as well as stock, what would be your top pick?
Jay Thakkar: See, as far as the sectoral performance is concerned, we all know that in last three or four months oil and gas sector, auto sector, realty, energy sector, all of these have really underperformed the Nifty and that is where we have seen FII in fact selling out from those sectors, in fact we have seen DIIs also liquidating from those sectors and the money has actually moved. So, when you check the money flow, it has moved to the sectors like consumer durables, capital goods, pharma, IT, these kind of sectors.

So, I believe that going forward pharma is likely to perform well as well and stocks like Dr Reddy's, Divi’s Labs, Laurus Labs are the recommendations from our side which we believe are likely to perform well going ahead.
As far as the short covering candidates are concerned for the initial couple of months for calendar year 25 because we have seen there was huge short data as far as Asian Paints or probably the FMCG names like Nestle which is an MNC, stocks like Reliance, Axis Bank from the banking pack, and Bajaj Auto and Tata Motors from the auto, so these are the sectors like FMCG and others I mentioned have really underperformed, they are likely to underperform going forward as well for the initial quarter of 25 they are likely to see short covering, but the performance is likely to continue we believe in consumer durables, capital goods, some part of metal, hence we have a buy recommendation on Ambuja Cements, we believe that it is likely to perform quite well from here on, also stocks like Vedanta are likely to perform, Zydus Life has seen a good amount of long liquidation but that has come to a good support so Zydus Life would be a good buy.

So, pharma, consumer durables, capital goods these are the sectors to watch out for in 2025.