Expert view: A hefty pre-budget rally unlikely; focus on proxy-play approach, says Green Portfolio co-founder

Expert view: Divam Sharma, co-founder and fund manager at Green Portfolio, believes that since Budget 2024 was a populist budget, the Union Budget 2025 may bring a little break for the middle class. Sharma expects the government to focus on infra and railways but does not expect the Indian stock market to witness a significant pre-budget rally.

Edited excerpts:

What is keeping the Indian stock market volatile? When do you expect sentiment to improve?

Although markets closed on positive notes last year, the euphoria lasted only a while. The new HPMV virus has kept markets on their toes since the detection of infant cases in parts of India.

Retail investors fear strict government measures in case the cases spike, although the virus has resurfaced since 2001 and takes the form of a common cold and cough.

Another concern is Trump’s resumption of office on January 20th, as he is expected to bombard the countries with new rules and announcements. We are also waiting for companies to declare their Q3 results.

⁠Do you see a scope for a pre-budget rally in the Indian stock market?

After a populist budget last year, we do not expect a very hefty pre-budget rally this year. The capex numbers are out, and this year, too, the government might miss out on its capex targets.

The last budget focused on giving state governments more liberty in spending on public infrastructure. Social media has been abuzz with news that the Finance Minister might also cut taxes on personal income. Still, this seems unlikely, as taxes are the government’s primary source of revenue.

FIIs (foreign institutional investors) and DIIs (domestic institutional investors) could allocate their money pre-budget to a few selected sectors, such as infra, railways, green energy, and defence. However, a rally is still off the table because the consumption trend has weakened, and inflation numbers are hurting the masses.

What are your expectations from the Union Budget 2025?

Since the last budget was a populist budget after the BJP regained power for the third time in general elections conducted last year, we expect the Union Budget 2025 to bring a little break for the middle class comparatively, considering the low level of consumption trends this year, especially the rural demand.

The focus would remain on public infrastructure. Highways, roads, and railways will be key focus areas.

Railway tracks are something that the government might put pressure on because the current layout is not suitable for high-speed trains.

The government has been missing out on airlines for the last decade, and even the current airlines with major market shares are struggling.

After the US power shift, sectors like IT and pharma might see a boost backed by strengthened dollar revenues. This would mean the government needs to focus more on improved healthcare and R&D.

Shrimp exports have been receiving attention for the last three to four years, but nothing substantial has resulted from them.

Inflation is close to RBI’s target, but we could see a fluctuation in rate cuts.

If the government develops a robust tax framework and better execute agreements in the public and private sectors, markets might open and close on an exhilarating note.

What are your hopes for the Q3 earnings season? Will it be better than the previous quarter?

We feel export-oriented sectors will do much better due to the weakening rupee and strengthening dollar.

ITs have remained one of the most liked sectors by FIIs, and the sectors remain in a positive zone due to expected rate cuts in 2025.

Q1 and Q2 showed muted performance, and we worry that Q3 will be a hattrick.

What sectors should investors look at for investments at this juncture?

As we approach 2025, the path to smart investment may seem challenging, but focusing on key sectors can prepare you to beat market volatility, shifting government policies, and rapid technological advancements.

India’s fourth-largest FDI recipient telecom sector employs 4 million people. Innovations in 5G, AI, and edge computing are revolutionizing industries, with 6G poised to enhance industrial applications by 2030.

The pharmaceutical sector grew by 8 per cent in 2024 to ₹2.20 lakh crore and is projected to grow even further in 2025.

Dollar revenues benefit exporters, but global tightening challenges them. Companies investing in R&D for oncology and other high-growth areas are expected to outperform.

The automotive industry thrives on festive demand. Premium SUVs and luxury cars reflect aspirational consumer trends. Packaging and consumer staples see steady growth, driven by rising incomes, organized retail, and branded product preferences.

Overall, these are the four key sectors for investors to focus on: telecommunications, pharmaceuticals, automotive, and packaging. Each offers growth potential driven by innovation, rising incomes, and shifting consumer preferences.

How should we approach the mid and small-cap segments?

Investors can capitalize on mid and small-cap opportunities in selected sectors by targeting innovation and premiumization trends for consistent returns in 2025.

In 2024, the market (BSE Sensex) delivered a modest 8.5 per cent return, while BSE Midcap and BSE Smallcap outperformed with impressive gains of 25 per cent and 28 per cent, contrary to expectations favouring large caps due to midcap valuations.

Considering these trends, it’s time to refine our investment strategy for the new year by focusing on a proxy-play approach. For optimal returns, prioritise companies positioned lower in the production chain but higher in the value chain.

To navigate cyclicality in this sector during economic downturns, consider a proxy-play strategy by investing in small and mid-cap companies. For instance, with the government’s push for 5G, instead of investing directly in giants like Airtel or Jio, focus on companies supplying 5G hardware and infrastructure components. However, remember that higher rewards come with greater risks.

By targeting mid and small-cap companies within the growth sectors and leveraging the proxy-play strategy, investors can stay resilient and expect to achieve consistent returns to outperform the market in 2025.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.