As 2024 drew to a close, Indian markets demonstrated their characteristic resilience amid global uncertainties. While Q4 brought a notable correction after years of exceptional gains, the underlying growth narrative remains compelling. In this quarter-end report, we explore how the recent market adjustment has created selective opportunities across large caps while highlighting structural themes that continue to drive India’s growth story. We hope you find these insights valuable as you navigate the year ahead.
The MSCI India Index declined 2.87% (in USD terms1) in December, bringing fourth-quarter returns to -10.62%. Sector-wise, Health Care and Real Estate were the top performers for the month, while Utilities and Energy were the laggards. For the full quarter, all sectors ended lower in Q4, though IT and Health Care were the relative outperformers, while Utilities and Energy remained the weakest performers.
Despite the fourth-quarter pullback, Indian markets posted strong gains for calendar year 2024, with the MSCI India Index rising 12.45%. The market correction from September highs was primarily driven by foreign institutional investor (FII) outflows amid global volatility. While FIIs withdrew ~USD 12 billion from Indian equity markets in Q4, strong domestic institutional investor (DII) participation helped cushion the impact.2 Record systematic investment plan (SIP) flows of approximately INR 250 billion (~USD 3 billion) per month contributed to the USD 22 billion in domestic inflows during the quarter.3
While economic indicators showed mixed trends throughout the quarter, some positive signals emerged. The services sector demonstrated particular strength, with services PMI rising to a 4-month high of 59.3 in December (vs 58.4 in November) as consumer sentiment remained resilient.4 India’s goods and services tax (GST) collections for December 2024 remained strong, reaching INR 1.77 trillion (USD 20.7 billion) and marking a growth of 7.3% y/y.5
Manufacturing activity, however, showed signs of weakness. The manufacturing PMI softened by 0.1pt to a 12-month low of 56.4 in December. Although the expansion slowed, both output and new orders continued to rise in December and the headline figure remains above its long-run average of 54.1. Elsewhere, government capital expenditure growth was slower than expected this quarter, averaging 3.7% in October-November.
Inflation remained a key focus during the quarter. The headline consumer price index (CPI) reached a 14-month high of 6.2% y/y in October, driven by rising food prices, before moderating to 5.5% in November. Core inflation remained stable at 3.7% y/y in November, suggesting contained underlying price pressures.
As we usher in the new year, global markets are keenly anticipating forthcoming policies from the US, which are poised to set the tone for economic dynamics worldwide. Given the elevated US market valuations, we expect markets may increasingly question American exceptionalism over the next 6-9 months, potentially benefiting emerging markets, which are trading at their most attractive levels in years.
For now, market dynamics appear to be caught in a delicate balance. While economic resilience is preventing a significant market downturn, persistent high bond yields and tariff uncertainty continue to create uncertainty. Currency stability has also emerged as a critical focus area going into 2025. The Indian Rupee’s slide to 85 against the USD by end-2024 and the Chinese Yuan’s movement to 7.30 have raised concerns about regional currency dynamics.6 We are closely watching these movements; particularly the Yuan – if it stays firm, then the pressure significantly reduces on other Emerging Market currencies for a competitive devaluation. With an annual trade surplus of over USD 900 billion and the focus on domestic consumption and internationalization of the RMB, unless a significant tariff increase happens, we expect the RMB should continue to be stable.7
While markets navigate immediate concerns around policy shifts, a deeper structural challenge looms in the US economy. Beneath the surface of economic resilience, the US is grappling with significant fiscal challenges. The federal deficit reached USD 1.8 trillion, or 6.4% of GDP, in the FY24 fiscal year – a record level outside of war, recession, or emergency.8 The situation appears set to worsen, as the Congressional Budget Office projects federal debt held by the public will climb from 99% of GDP in 2024 to 122% in 2034.9 This trajectory is driven largely by mandatory spending, which at USD 4.1 trillion is more than double that of discretionary spending and growing faster due to aging demographics and rising healthcare costs, making the path to fiscal sustainability increasingly critical.10
Despite these fiscal headwinds, we see potential for improvement through rising productivity growth. Even a modest increase in productivity could significantly improve the debt-to-GDP ratio to more manageable levels in the coming years. As AI pilot projects transition into large-scale implementations, we may witness a productivity surge reminiscent of the 1920s boom era. If optimistic scenarios of an AI-driven productivity revolution materialize in the latter half of this decade, it could strengthen the US economy’s growth trajectory without triggering inflation. Such a development would have positive ripple effects across emerging markets through increased US import demand, greater investment flows, and technology spillovers, while contributing to broader global financial stability.
As the US and top corporates globally focus on boosting productivity through AI, Indian IT services firms are well-positioned to benefit. The market for outsourced IT services in data and AI is expected to reach US$200 billion by 2029, growing at a 19.1% CAGR.11 Leading companies like Tata Consultancy Services (TCS), Infosys, and Cognizant are becoming essential partners in this AI transformation. They are developing their own enterprise-scale solutions and partnering with top AI providers to create industry-specific applications, effectively bridging the gap between AI potential and business needs. With decades of IT experience, deep expertise in enterprise systems, and a large pool of skilled technology workers, these firms are equipped to drive AI adoption and meet the rising global demand.
Indian equity markets experienced a notable pullback in late 2024, a natural consolidation following the remarkable 3-5x gains witnessed across many stocks in the preceding three years. While this correction phase is likely to continue, particularly in the small and mid-cap segments, India’s fundamental growth story remains intact. With real GDP growth expected to maintain a robust pace of 5-6% p.a., India stands out among major economies. The government’s fiscal prudence, healthy foreign exchange reserves, and relatively stable currency provide a solid foundation for medium-term investment prospects, even as markets work through their current adjustment phase.
Given the current market environment, we are conservatively positioned for Q1 2025 but remain poised to capitalize on opportunities as they appear. The recent market correction has created selective opportunities, particularly in large-cap segments. We have increased exposure to the IT and pharmaceutical sectors and will maintain a bias towards large-caps for the next 5-6 months. We would also look to selectively bottom fish large-cap banks and Reliance, for example.
This period of price discovery should also present attractive entry points for industrials, power utilities, and autos, as well as select mid-cap companies. These segments continue to benefit from India’s structural growth drivers while offering more reasonable valuations following the recent market adjustment.
Indian pharmaceutical Contract Development and Manufacturing Organizations (CDMOs) companies have recently attracted investor attention due to the anticipated benefits they would have gained if the US Biosecure Act had been passed. Over the past two quarters, client inquiries have surged as businesses aim to reduce their dependence on Chinese CDMO suppliers. However, this momentum has slowed following the exclusion of the Biosecure Act from the National Defense Authorization Act (NDAA) package, diminishing the likelihood of its enactment. Additionally, Senator Rand Paul, a prominent opponent of the Act, is set to chair the Homeland Security Committee under the Trump administration, while key supporter Brad Wenstrup is retiring—both factors threatening the legislation’s future.
Although this may create a negative sentiment around Indian CDMO companies, we believe their near-term financials were unlikely to be significantly impacted regardless. In fact, our research indicates that Chinese CDMO providers had significantly reduced their prices to mitigate potential losses from the Biosecure Act, particularly for short-term projects with 1-2 year timelines, given the 8-year moratorium under the Act. Regardless of the Biosecure Act’s fate, we believe that the long-term trend of decoupling and diversification away from Chinese players will persist, benefiting Indian CDMO companies. Thus, any significant market correction could present a compelling opportunity to add to the sector.
Elsewhere, in the retail space, the declining costs of lab-grown diamonds (LGD) are making them increasingly affordable, now priced at roughly one-tenth the cost of natural diamonds.12 This significant price difference, especially for larger stones, is driving a shift among consumers from natural to lab-grown diamonds.
India, a global hub for diamond cutting and polishing, processes nearly 90% of the world’s diamonds, positioning it as a key exporter of finished LGDs and a leader in the growing domestic market.13 This shift is impacting traditional players; for instance, Tanishq, one of India’s leading organized jewelry brands owned by Titan, saw its studded jewelry mix drop by 300bps y/y in 2QFY25 due to weaker demand for high-value solitaire diamonds.14 However, sales of smaller and non-solitaire diamonds provided some offset.
We are closely monitoring the LGD market’s progress and its implications for the industry. Despite the rising adoption of LGDs, organized jewelry retailers in India continue to thrive by offering trust, modern designs, and premium shopping experiences. This resilience highlights opportunities for growth and potential adaptation to the evolving market landscape.
Last quarter, we focused on healthcare outsourcing and financial services as key opportunities. This quarter, our attention shifts to India’s expanding manufacturing sector. These themes represent opportunities we believe will deliver substantial value over the coming years.
The post-COVID era has marked a notable shift in India’s manufacturing presence on the global stage. Many Indian firms have successfully integrated into international supply chains, capitalizing on competitive advantages such as lower production costs, accessible labor, and a more flexible regulatory environment.
Additionally, geopolitical factors, such as the tariffs imposed by the Trump administration on Chinese goods, have accelerated the China+1 strategy among global businesses. This shift encourages companies to diversify their supply chains by adding India as an alternative manufacturing hub, thereby enhancing India’s attractiveness on the global stage.
A prime example of this trend is CG Power, a leading Indian engineering company with manufacturing capabilities across power equipment, industrial systems, etc. The company is experiencing robust growth with a projected EPS of 29% CAGR through FY27.15 CG Power is steadily expanding its international footprint by securing new orders in regions such as South America, the Middle East, and Africa. The company has also introduced premium ranges like the NEMA series in the commercial motors space for developed economies like the US, to boost its standing in global markets. We saw similar ambition at Triveni Turbines when we visited their facilities in November, which has grown to become the world’s second-largest industrial turbine manufacturer, serving customers in 80 countries.16
This strategic positioning enables these companies to not only meet domestic demand but also to establish themselves as key players in global markets. With strong order books, expanding capacity, and increasing investment in R&D and quality control, leading Indian manufacturing companies are positioning themselves for sustained growth in international markets over the coming decade.
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Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this material are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements.
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Shikhara Investment Management LP is currently an Exempt Reporting Adviser that is exempt from registration as an investment adviser with the U.S. Securities and Exchange Commission and Shikhara Capital (Hong Kong) Private Limited has been approved by the Hong Kong Securities and Futures Commission. This website does not constitute an offer to sell or the solicitation of an offer to buy in any state of the United States or other U.S. or non-U.S. jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction.
Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this website are statements of future expectations and other forward-looking statements. Views, opinions, and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance, or events may differ materially from those in such statements.
Certain information contained in this website is compiled from third-party sources. Whereas Shikhara Investment Management has, to the best of its endeavor, ensured that such information is accurate, complete, and up-to-date, and has taken care in accurately reproducing the information, Shikhara Investment Management takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this website. Neither Shikhara Investment Management nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this website are prepared and maintained by Shikhara Investment Management and has not been reviewed by the Securities and Exchange Commission of the United States or the Securities and Futures Commission of Hong Kong.
The Shikhara logo and name are trademarks of Shikhara Investment Management LP, registered in Hong Kong, the People’s Republic of China (PRC), Australia, the United Kingdom and the European Union and pending registration in the United States.