Indian Share Markets Could Face these 3 Big Risks in 2025

The correction in the market caused serious concern among investors and traders.

The Nifty is down about 13% from its all-time high. But the broader market of midcaps and smallcaps is down more.

In fact, the smallcap index is close to a 20% decline from its all-time high. This means that small-cap stocks, as a group, are close to entering a bear market.

This is important because most retail investors have smallcaps as the main component of their portfolio. The number of midcaps and largecaps make up a small minority of their portfolios.

Thus, retail investors have borne the brunt of the losses in the market during this correction. Prominent smallcaps have seen massive declines over the last one month.

Here are just some examples:

• Netweb Technologies (-40%)
• KEC International (35%)
• Newgen Software (33%)
• Sterling Wilson Solar (31%)
• Motilal Oswal (29%)

High flying new age stocks like Mamaearth and Tanla Platforms are down 50% over the last one year.

Top Losers in the BSE Smallcap Index - 1 Year

Even among midcaps many popular names have taken a beating. While Kalyan Jewellers leads the way with a 40% fall, other prominent names like Godrej Properties, Supreme Industries, Suzlon Energy, Thermax, Policy Bazaar, and Paytm are all down 20% or more.

Most retail investors in the market are looking to speculate on midcaps and smallcaps and have suffered losses. This approach of overinvesting in smaller companies creates a level of volatility in the market that few can handle with a calm mind.

It also causes anxiety about the actions of others. If you choose to hold while others sell, you will end up selling at a lower price. This creates fear which itself becomes a driving force behind stock prices.

So, could the markets go down further?

To answer this question, we will examine the big risks to the market in 2025 in this editorial.

#1 Interest Rates

There is a risk of interest rates staying high for longer than the markets expect.

Central banks have made it clear that they want to control demand to the extent that it brings inflation under control.

Falling inflation had raised hopes of interest rates coming down. However, inflation might not come down much more, at least in the short term.

This has hurt the chances of interest rates coming down quickly. This in turn has hit sentiment on the stock market.

All eyes are on the RBI's next monetary policy meeting. If the RBI does not cut the repo rate, market sentiment will take a further hit.

#2 Trade Wars

This will depend a lot on what Trump does with respect to trade.

We're not saying Trump will start a trade war with India. That is highly unlikely.

But the world is an interconnected place. In a globalised world, a decision that hurts one country will have a ripple effect on another.

Trump's threat to impose tariffs on a small country of Columbia was enough to spook global markets.

Image the hit to sentiment if tariffs are threatened on economically more important nations like Canada, Mexico, and of course China.

Also, there are specific sectors, like software, jewellery, textile, commodities, and finance, that are more integrated with the global economy than others.

Thus, if trade wars were to heat up, India will feel the heat. Most companies might not feel the effects too much but the companies in the impacted sectors will take a hit on the stock market because investors wouldn't want to take the risk of holding on to those stocks.

You can read more about this here.

#3 Valuations

This is probably the most important risk for the market.

We believe, the main reason for a correction in the market was the bull market that preceded it.

Yes, that's right. The bull market itself was the cause a serious correction. There is a possibility of this correction turning into a bear market.

Why do we say this?

Well market veterans know something that most investors either never realise or understand only after a big crash or bear market.

Huge losses in the stock market are almost always because retail investors ignore either the fundamentals or valuations (or both) of the stocks they buy.

In other words, retail investors fall prey to the following mistakes.

They buy low quality stocks or stocks with big risk factors and think they would be fine in the long term due to the company's growth.

They buy highly overvalued stocks, like high PE stocks, and think it wouldn't matter in the long term because of the expected price appreciation.

What many retail investors fail to realise is that a rising market makes them feel these mistakes don't exist. This is because rising stock prices hides these mistakes. Rising prices create the illusion that investors have made the right decision.

This prevents retail investors from selling junk stocks at the right time. They hold on to them expecting ever higher returns, convinced they have made a good choice buying that particular stock.

You see, the higher the market rises, beyond what is justified by earnings growth, the riskier it becomes to have money in the market. This is measured by the humble PE ratio.

The Nifty's PE was close to 25 at the start of the correction. Market veterans know this is a good thumb rule for thinking about risk and caution in the Indian stock market.

It's not surprising that the market reversed direction from that particular valuation.

Conclusion

So, what should you do if the correction continues?

Well, a clean-up of your portfolio should be in order.

Here are some things to look for in your portfolio...

• Check for any stocks with weak fundamentals.
• Check for any stocks with a recent negative change in the fundamentals.
• Check for stocks where valuations have shot up without an improvement in earnings.
• Check for stocks in which you have made a mistake in your original analysis.
• Check for stocks where the price has shot up without much of a change in the fundamentals.

These are all good reasons to sell or at least reduce your holdings.

But as is the case with any stock, you must allocate sufficient time to do the necessary due diligence. This is true both, before and after buying.

Also consider corporate governance as a key part of your due diligence on the stocks in your portfolio.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...