Jul 31, 2025
Macro good | Micro to improve gradually
The Nifty 50 extended its winning streak for the fourth straight month in June 2025, rising 3.1% to close at 25,517, marking its first close above the 25,000 mark since September 2024. Year-to-date, the index has returned 7.9% in CY 2025. Over the past 12 months, large-cap and mid-cap equities have posted gains of 6% and 7%, respectively, while small caps have lagged with a more modest 4% rise.
Notwithstanding recent market strength, FIIs have recorded net outflows of USD 8.2 billion in year-to-date 2025, a sharp escalation from the USD 0.8 billion withdrawn over the entirety of 2024, reflecting more pronounced selling pressure earlier in the year.
In contrast, net inflows into Indian equity mutual funds have remained robust. Equity inflows totalled ₹1,781 billion so far in 2025, compared to ₹4,506 billion for the full year 2024, the highest annual tally in over two decades.
Source: Kotak Institutional Equities
The first half of 2025 has been shaped by earnings slowdown, elevated geopolitical tensions, and rising global economic frictions, setting the stage for a highly watched 1QFY26 earnings season. Amid these crosscurrents, including India’s own ongoing border challenges, the country has demonstrated notable resilience across macroeconomic indicators and financial markets.
Over the past quarter, market movements were broadly in line with expectations, and the performance of our strategies relative to their respective benchmarks is summarised below:
As on 30 June 2025
As highlighted in our previous notes, we are entering a short-term phase of uncertainty, volatility, consolidation, and readjustment, positioning for the next upward leg, driven by the following factors:
• Slowing corporate earnings
• Slowing government spend, both central and state
• Dwindling private capex
• Uncertainty around US tariff policy
• Elevated equity issuance by PE/VC investors and MNC promoters, contributing to rupee depreciation
• And finally, stretched broader market valuations
Over the past six months, the above factors have played an instrumental role in equity markets, leading to heightened volatility and a realignment across sectors, stocks, and investor sentiment.
As we re-evaluate the prevailing headwinds, we believe that while the economy is not yet out of the woods, early signs of recovery are emerging.
Earnings outlook – the earnings downgrade cycle seems to be moderating. Though early Q1 results reflect subdued on-ground demand, there is increasing visibility of a recovery over the next two quarters, led by the three I’s.
• Interest rates – The RBI has reduced policy rates by 100 bps in CY25, creating room for lower borrowing costs
• Income tax rates – Policy changes are expected to leave ₹1 trillion in consumers’ hands, boosting both savings and discretionary spending.
• Inflation – At 2.1%, its lowest level in approximately seven years, easing price pressures are bolstering real income growth and consumer confidence.
In addition, the RBI has infused ₹9.8 trillion of liquidity into the banking system and reduced risk weights on select sectors, signalling a deliberate intent to revive credit growth. Together with rate cuts, this points to a more decisive policy thrust aimed at stimulating demand and reinforcing earnings momentum.
Government and private capex are showing signs of recovery, though overall spending is expected to remain flat year-on-year. Central government capex has risen strongly in CY2025, particularly in the second half of FY25 and early FY26. However, total outlay for the full year is projected to hold steady at ₹11 trillion. In contrast, state governments face ongoing fiscal constraints, with a significant portion of their budgets directed toward subsidies and welfare schemes, leaving them largely dependent on central initiatives to drive capital investment.
The U.S. tariff landscape remains fluid, with markets gradually adapting to the evolving regime. While select trade agreements have been concluded, deals with two key economies, China (the world’s largest manufacturer) and India (the fastest-growing large economy), are yet to be finalised. A 10% baseline tariff on nearly all imports is already in effect. With the 01 August deadline approaching, uncertainty lingers as negotiations continue behind closed doors.
Supply of equity paper continue – With buoyant markets over the past few years, rich valuation premiums, and record inflows into equity mutual funds from domestic investors, the supply of equity issuance remains elevated. Promoters have been monetising their holdings at an unprecedented pace in the Indian markets.
Source: Kotak Institutional equities
Broader market valuation remains elevated – Within the three market capitalisation buckets, the small cap segment continues to trade at the steepest premium to long-term averages, approximately 50% above its 10-year mean followed by mid-caps at a 16% premium. With valuations having reverted to January 2025 levels and earnings likely to remain broadly weak, we anticipate a return of volatility in the markets.
As of 24th July 2025, Spark Institutional Equities
Way forward and portfolio perspective
The year has unfolded broadly as anticipated, with an earnings slowdown and a range of macroeconomic headwinds weighing on the first half. Both global and domestic challenges have contributed to an environment of market adjustment.
At this juncture, we are not completely out of the woods. Volatility is likely to persist in the coming quarters, as several factors continue to weigh on market sentiment. However, as noted earlier, the measures undertaken by both the RBI and the government, on fiscal and monetary fronts, are expected to filter through the economy, ultimately supporting earnings growth.
On the portfolio front, there has been meaningful improvement. Our conviction plays in the financial and the NBFC space performed well during the quarter, with the RBI’s rate cut poised to further benefit NBFCs by lowering their cost of funds going forward.
We have made adjustments across both portfolios. We are actively reducing exposure to select index-heavy stocks and have exited specific positions to rebalance and optimise positioning. For instance, we exited Tejas Networks from the Titans portfolio due to uncertainty around its growth outlook, following its failure to secure a follow-up order from BSNL.
Additionally, we have introduced new positions in key sectors, including Apar Industries, Bharat Heavy Electricals, and Vishal Megamart in our Titans portfolio, and JSW Energy in the Olympians portfolio.
While energy and power sectors are most talked about sectors due to growing global demand from rising consumption, data center expansion and transition to green energy. We have added stocks in this space.
• Apar Industries specialises in power conductors, cables & wires and transformer oils. After a correction of approximately 50%, it was available at 22x FY27e, offering strong earnings visibility.
• JSW Energy, one of India’s largest private thermal and wind utility company, is expected to grow its capacity at a 21% CAGR through organic and inorganic expansion.
• Bharat Heavy Electricals is a leading manufacturer of critical components for India’s thermal power sector. With a dominant market share and exit of legacy low-margin orders, we expect both revenues and margins to significantly improve.
We also believe the consumption sector could emerge as a dark horse over the next couple of years. The government’s focus appears to be shifting from large-scale capital expenditure over the past five years to increasing disposable income in the hands of consumers. This, coupled with the likely implementation of the 8th Pay Commission next year, could provide a meaningful boost to domestic demand. In this context, we have added Vishal Megamart, one of India’s largest value retailers, which we believe could grow at a 22–25% CAGR, supported by continued store additions and operating leverage from scale.
While we remain bullish about India’s long-term structural growth story, we continue to expect short-term market volatility. We are beginning to see improvements in the performance of our inhouse strategies and believe that the momentum has shifted in our favour for the strategies going forward.
Here is how our flagship strategies have performed over different time periods.
Portfolio Performance
