Market Outlook for December 2025 by Mr. Nilesh Shah

Coming to global economy, the inflation is dropping across the world.

Which is why now various governments are talking about their own ladla schemes and money will be printed across

the world in 2026.

The debt to GDP ratio for G7 economies is rising.

That's partly because of stimulus and partly because GDP is not growing as fast as it requires more and more debt to grow.

Consequently, we have reached a level which was not taught in our school or college. We were always told that

college. We were always told that government securities are the risk-free securities.

Now there are companies like Microsoft, Lario, Cementsmen, Airbus which are trading below government securities.

People feel Microsoft is more dependable than United States of America or Airbus is more dependent than the European

Union.

As fiscal stimulus is going up, number of interest rate cut across the central banks will start coming down in next

year and year after that. Today Fed is likely to announce rate cut. But

hopefully or probably this will be we will see fewer and fewer of the same in the days to come.

Global growth will slow down a little bit from the 2025 level and inflation will go up a little bit because of the

base effect.

For market the biggest risk remains one US China conflict on the technology side. Second artificial intelligence is

side. Second artificial intelligence is it bubble or is it real?

the return of inflation as central banks have cut rate and fiscal stimulus is happening and finally whether there is

ddollarization.

All this will shape 2026 in the days to come.

One interesting phenomena is Japanese bond from about 0% interest rates as late as mid 2021.

Now 10-year Japanese bond is about 1.93%.

Undoubtedly this can shake yen carry trade. This can

have implications on global markets.

Fortunately in India we haven't seen too much of yen carry trade money coming in.

Hopefully we will remain immune.

Coming to Chinese economy clearly Chinese government is pushing fiscal stimulus.

They are spending more and more money to grow their economy.

They also have their larly bha scheme like a democratic country.

Their investment cycle has remained fairly strong. If we compare capex as a

fairly strong. If we compare capex as a percentage of GDP in real terms, many countries before China like Japan,

Korea did witness high level of investment but that was for a brief period of time.

China is running marathon at the rate at the speed of a sprint which Japan and Korea did in the '9s and 80s.

Can they continue to run at gravitydefying speed? Well, so far they

gravitydefying speed? Well, so far they have been doing it. Who knows where is the future?

By virtue of their large investment, they have excess capacity.

They are manufacturer to the world with almost onethird share of global manufacturing at more than $4 trillion.

And which is why they also run large trade deficit with most of the country.

Because of this excess capacity, Chinese inflation is now below global inflation in developed nations and their

10ear yield is now below Japanese 10-year yield.

Over last one year, two year, Chinese stock market has delivered good return that has attracted foreign capital into

China.

From our point of view, while Chinese markets have done well, Chinese economy has done well, Chinese

corporate earnings haven't done well over last almost eight years. If we see their earnings growth is barely about

20% compounded.

The economic growth is not resulting into corporate profitability in simple words as companies have kept on investing even at the risk of lower

return.

From our market point of view, we want to see whether China is six time lucky or not.

In the past five cycle over two decades, Chinese markets have gone up and come down like Indian market had done between 1992

to 2003.

We were going up and down but not able to cross previous high in China. That

has happened five times. Will it happen six time or will they be lucky? If

Chinese market corrects, capital will flow to India. If Chinese market continues to rise, to that extent there

will be less capital to India.

What we could learn from China the way they have become manufacturer to the world their entire lending mechanism

has moved from real estate to indust industrial sector manufacturing sector.

Can we push manufacturing or industry as a percentage of GDP from current level or as a percentage of bank loans from

current level will determine how successful we will be as an economy.

Earlier I mentioned that Chinese economic growth is not translating into corporate earnings. And this chart also

corporate earnings. And this chart also shows how marginal product of capital is slowly and steadily coming down in China

because of those large investment.

China today is global leader in many of the future futuristic industry like solar panel, highspeed rail, electric

vehicle and so on and so forth.

The other interesting thing is China at the forefront of research.

This is related to medical science and drugs development.

Just see how China's share has grown over last 25 years. India unfortunately

is a very very small percentage there.

Other interesting thing to learn from China is the accountability of bureaucracy.

If bureaucrats fail to deliver, they are punished as reflected in bottom chart.

More than 200,000 bureaucrats have been punished for non-dely wish something like that can happen in

India.

Chinese growth rate undoubtedly is impressive especially related to futuristic industry

and they have employed all tools s to be leader in futuristic industry.

Coming to US economy, we have seen various cycle in US economy.

There was a time when bankers and financials were contributing significant part of S&P 500.

Then construction, infrastructure, railroads came. Then

railroads came. Then basic manufacturing like utilities, material, energy, real estate came and

now we are seeing it, telecom, healthcare becoming large part of the economy and market cap.

The drivers for American growth is Fed policy. They are likely to cut rates,

policy. They are likely to cut rates, government spending.

Despite all the promises on dodge, the fiscal deficit is widening, the tariff policy which President Trump has been utilizing successfully against

its peers and finally the deregulation where they are encouraging AI to create

better growth.

Last quarter, investments in AI and no and and technology resulted into the overall growth.

In the recent time, AI stocks have corrected led by Oracle and other companies

within S&P 500.

Despite price correction in AI related stocks, the earnings growth is driven more by magnificent seven companies

rather than broad 493 other companies.

This divergence in earnings at some point of time will be reflected into stock prices as well.

The real challenge for US is after putting all these tariffs, will US be able to manufacture goods

required by their economy and will they have labor to do the manufacturing work or they will need robots to do that

work.

One study shows that whenever US has led tariff over a period of time, it passes to the

US consumer.

In June 25, 25% of tariff was born by US consumers.

As of October 25, that proportion seems to have increased to 67%.

And which is why now President Trump is talking about exempting certain essential goods.

There are few signs of weakness emerging in US economy in terms of hiring and wage growth.

Will this sustain and put pressure on economy or will the fed rate cut which are being announced take care of the

growth? We'll have to see in 2026.

growth? We'll have to see in 2026.

The approval rating of President Trump has [snorts] consistently kept on coming down.

How does it prompt him to look at tariffs or how does it prompt him to look at

investment and other factors?

US debt continues to expand. Dinduna

rajoguna now it is touching $ 38 trillion.

The current and fiscal deficit of US will be in double digit combined.

And fiscal deficit in recent times is comparable to either wartime period or crisis time period like subprime and

covid.

From our point of view most important thing whenever dollar has depreciated people have taken money out of America.

As of today, almost $30 trillion worth of global investment is lying in America

across treasury, equities and corporate credit with 10% drop in DXY index. They

have already lost $3 trillion.

At what level of losses people will shift from America to other markets?

Coming to Indian economy, we continue to get headlines which are by and large supportive of growth. The second quarter GDP growth at 8.2% was much higher than

expected.

On the other hand, rupee went past 90 for the first time.

Overall from a fiscal prudence point of view we are the only major economy to reduce its debt to GDP ratio between subprime

crisis and COVID crisis.

Markets have rerated us in terms of how we are borrowing visa with US on a 10-year security.

Our per capita GDP is now growing faster than Asian peers on a purchasing power parity basis.

American tariffs are hurting some of the sectors like textiles, aquaculture, gem and jewelry and handiccraft.

These are the sectors where large number of Indians are employed.

And while our exports to us has come down, exports to other parts of the world has started inching up.

Government has be has gone on overdrive to support growth. Income tax rebate, GST cut, interest rate cut, 8th pay

commission recommendation which will become effective in which will probably get announced in 2027. Effective first

gen 26 gaming ben searching alternate export market which we can't export to US.

doing trade negotiation with US and launching credit guarantee scheme all are pointing that

the adverse impact of US tariff on our economy will be limited slowly but steady steadily our share on

services exports have started rising albeit on a goods export we haven't done a good job

The GST cuts and festival season demand has resulted into higher retail sales across various categories.

We have to hope and pray that it gets sustained in the days to come.

The second quarter GDP growth was as Swami Natan Shara a year mentioned like 1983 Indian cricket team winning World

Cup. There were good ballers, good

Cup. There were good ballers, good batsmen's, good fielders and good wicket keeping and all round performance.

For the first time after many quarters, consumption investment and government spending all moved in

tender to create 8.2% growth. It was not driven by just one factor.

The rebound was spread across agriculture manufacturing construction, public spending, trade as well as financial services.

This is all round performance of economy which gives confidence that probably this can be sustained.

Rural wages have started improving which is why rural economy is doing better than urban economy.

Consumption growth seems to be maintaining the momentum thanks to all the steps taken by government for putting money in the

pockets of consumers and more importantly this consumption is spent on swadeshi good

overall we believe there are better chances of GDP coming above 7% for FI20 26

and between 6 to 6 and a half% for FI27 based on the momentum built.

The government spending is plateauing out as government pursues path of fiscal prudence which means private sector will have to take

the load.

The capacity utilization for last couple of years has remained around 75% which is fairly positive.

All the catalyst for private investments are in place in terms of banking ability to give credit in terms of capacity

utilization or debt to equity ratio for corporate sector. Yet investments have

corporate sector. Yet investments have not picked up, announcements have started happening.

Whether this announcements get converted into actual spending, we'll have to see.

But at least in the first half of FI26, people have started making announcements.

Rupee has fallen below 90.

It is going in between the big figure of 90.

The real challenge for India is the net forward which RBI or other banks have shorted in the

forward market while our reserves are shown at $700 billion rounded off there is $65 billion short forward position.

So effectively your net FX reserve is 700 -65 $635 billion.

With this kind of short position can rupee come under further pressure quite likely and we'll have to observe that carefully.

INR has depreciated across many other currencies like GBP, Yen, Renman B. This is helping

increase our exports to rest of the world. But with this kind of

world. But with this kind of depreciation of 5 to 16%, we should be able to do more on the export side.

Our thumb rule to evaluate status of the economy is nominal GDP

growth versus GST collection growth.

In the first quarter, April to June, GST collection growth was faster than the nominal GDP growth.

In the second quarter, thanks to the GST Bach Utso rate cuts that correlation has been broken and today

because of this rate cuts overall GST collection growth year to date April to November is well below

nominal GDP growth.

Will this have impact on fiscal deficit as projected by the finance minister and the budget or there will be abraaka

dabra through divestment and fiscal deficit will be maintained with all the challenges of ups and downs

on a purchasing power parity basis India will be contributing almost 9% of incremental global growth grow in next 5

years and we will be roughly about 1/5 of global economy on a purchasing power parity basis.

Converting this into equity market, the index is near all-time high but below the index portfolios are not

at all-time high.

In small cap index as well as midcap index many stocks have fallen

more than 15 20% from their 52 week high.

This differentiation between men's and boys is also reflected into outperformance of mutual fund over

benchmark indexes.

As many of us have lemons from a flow point of view, FBI have been net sellers

and DII have been consistent buyer.

Valuation wise our market cap to GDP ratio remains well above historical average

but profit to GDP ratio at 5.1% also is well above historical average.

FBI selling is driven by the fact that in last 12 months India has unp underperformed its peers.

Obviously Korea or Mexico or Brazil which delivered more than 40% return attracted capital flows and India which

underperformed all other markets witnessed outflows.

This was also driven by the fact that for last six quarters from June 24 to September 24,

Nifty50 pet growth was in single digit.

Your P ratio is in double digit and earnings growth is in single digit.

That's obviously going to disappoint investors.

The good part while large caps delivered singledigit earnings growth midcaps or beyond large caps delivered

doubledigit growth in last three quarters.

FBI has been consistently selling since 2020.

their ownership of equity is now around 15.6%.

Now this 15.6% we have to evaluate visav our benchmark index weight in MSEI emerging market index that's the index

which most FPI follow.

Now this is based on market estimates and EPFR of about 800 billion investments by FBI.

120 is by index fund and 680 is by active funds.

Index funds by nature will replicate index. So their weightage is about 18.5%

index. So their weightage is about 18.5% copying benchmark weight which means active funds are only having

15.1% weight not 15.6% weight underweight of active FPI is more than what is visible

to the eye. Will they continue to sell or at some point of time they will decide having 3% lower weightage in

India over benchmark index is too much and let me stop selling.

The FBI selling was driven by underperformance of India.

last six quarter EPS growth in Nifty50 single digit

US tariff and probably IPO supply.

The DII have consistently kept on buying probably looking at the future in terms of potential earnings rebound

and valuations coming to historical average.

from trading at a much higher premium to China.

Now we have come almost around our historical premium to China.

Same thing visav emerging market from trading well above historical leverage. Now we

are almost near historical leverage.

We normally trade at 67% premium to MSEI emerging market.

Sorry, we are currently trading at 67% to MSEI emerging market average. Our

historical average is 63%.

Will this push FTI to start looking back at India?

Quite likely.

Even from an economic point of view over last many years G7 share in global economy has kept on coming down

and led by China brick share in global economy has kept on going up.

This is not reflected into their investment as much as American market kept on outperforming bricks market.

Can market start reflecting economy at some point of time?

Second, there has been cycle where America does better than emerging market and vice versa.

Since almost 2011, American markets have kept on outperforming emerging market.

Maybe this cycle can come to an end.

More importantly from India's point of view, our earnings growth should rebound in FI27

over FI26.

That could also bring FPIs to our market.

Earnings growth in India will be driven by sectors like telecom, cement,

auto, financial services and chemicals.

Of course, there will be sectors like IT and utility which may underperform broad market earnings growth.

From a valuation point of view, large cap is trading around its historical average.

Historical average is 21 times. We are

trading at 21.5 times.

The small cap trades at a significant premium to its historical average 16.7 versus 29.2.

The IPO supply continues to remain strong and while there are IPOs like Misho which opens at a significant premium

there are also IPOs which are opening at a significant discount.

Overall we still believe markets will be rangebound and it will continue to watch what

happens on the tariff deal.

If there is a favorable tariff deal with US, there could be relief rally in the market temporarily

and then sectors like textiles, gem and jewelry, aquaculture they could bounce back depending upon

how the tariff deal is structured.

We believe FBI flows selling intensity will come down in calendar year 26

and net FI27 they will be a buyer rather than seller.

Markets will obviously keep a close watch on Indo Park tension, geopolitical risk, [clears throat]

IPO supply and earnings growth which is on rebound.

Over last 5 years almost 300 stocks have delivered more than 100% return.

192 stocks even today are trading at more than 50p and our outlook remains that going

forward return expectations will have to be moderated partly because there is no scope for valuation rerating

and hence earnings growth will be driver for your stock market return.

If you're coming with expectation of last five years return in small and midcap, you are likely to get disappointed.

But if you're coming with expectation of high singledigit, low double digit return over a period of time that may materialize.

As distributor, we'll have to convince our investors to stay invested for longer term with

moderated return expectation.

We believe for calendar year 26 FI27 midcaps will outperform market first then large caps and small caps probably

will underperform market because of the higher valuation portfolio wise neutral weight to equity

equal weight to large and midcap and underweight to small cap.

From an opportunity point of view, our fund on a rolling return basis continue to add value to investors by outperforming benchmark indexes across

various time period in equity as well as hybrid funds on a point-to-point basis. As I

mentioned small cap fund has failed to deliver midcap fund while the returns are absolutely in absolute term 20 to 25%.

Yet compared to benchmark it has underperformed in hybrid and equity again there is outperformance across most funds most

time periods and on the SIP basis again small cap and midcaps have failed to deliver but rest of the funds have outperformed benchmark

indexes significantly.

So despite all the noise about active funds not adding value, the data suggest completely differently.

Two fund which we want to bring to your attention one business cycle fund.

This is the fund where fund manager moves from one sector to another likely that our calls will go more right

than individual investors.

Second, there is tax deferment as we move from one sector to another.

This tax deferment itself will create better alpha for investors.

Instead of you jumping from one sector to another, this kind of fund will be a more appropriate.

Surprisingly, this fund is right at the top of the peer group. It is managed by Harish himself.

While one of his fund is right at the top, the other fund small cap is right at the bottom. He has the largest divergence across our fund managers.

Normally we want to remain in the middle but the second fund which we have for your consideration is pioneer.

This is investing into innovative companies in local market as well as global market. about 80% is local, 17%

global market. about 80% is local, 17% is global and again this fund has not only delivered alpha but outperform

majority of its peer this fund also is managed by Harish and I'm just trying to showcase that many a times when you build your

portfolio some calls come right some doesn't two of the three funds managed by Harish is right at the top quartile And one fund is right at the bottom

quartile. And which is why I think this

quartile. And which is why I think this is time to invest in Kotak small cap fund that construction of portfolio has taken

the pain of underperformance and from here onwards not necessarily tomorrow but over next 3 6 months you will see a rebound.

We are launching Kotak dividend yield fund. Again this is to fill the gap for

fund. Again this is to fill the gap for appropriate opportunity going forward.

As all of you know dividend is one component of the total return. There are

many companies which deliver less market return but higher dividend yield and total return combined is still reasonable.

By and large, dividend yield stocks underperform in momentum and outperform in correction. So they have lesser

in correction. So they have lesser volatility compared to normal equity.

You can have a look at dividend yield offer document and material and wherever appropriate for your customers you could

look to invest in it.

Our passive portfolio continues to expand.

We are one of the lowest expense passive fund house in the country.

[clears throat] And now we will launch couple of fund of fund on this passive fund both thematic and sectoral.

They all become onetop onetop solution for the customers.

These are our recommendation on passive funds.

Coming to debt market, US inflation has started cooling off but it is still

above Fed funds Fed's target of 2%.

There is reasonable possibility of a rate cut today and market is expecting Fed to do another two three rate cuts by next

year.

The RBI is betting like T20 in this credit policy. They give OMO for one lakh cr. They cut repo rate by 25

basis point and they also liberalized various banking guidelines to support growth from a credit point of view.

RBI could do this because inflation has come down significantly.

Our inflation also includes gold price movement. If we remove gold then we are

movement. If we remove gold then we are actually in negative inflation.

The projection for current year which when we started in April 20 April 25 was about 4%.

As we are nearing towards end it has come down to 2%.

The actual inflation has undershoot RBI's projection by a significant margin.

This is giving confidence to RBI to cut rates and keep on supporting growth even

though it is in higher trajectory.

Unfortunately, despite all the support by RBI, 10-year yields and 30-year yields have kept on moving up.

Today, as I speak, 10ear yield is roughly about 6.6. Six

after almost 125 basis point rate cut yield has gone up not come down.

There is likelihood that India could enter into Bloomberg index on global aggregate index level. If that

happens, one could probably see $25 billion inflows into debt market in India. that again could have positive

India. that again could have positive impact on yield.

RBI is on progrowth basis but their communication is creating confusion in the minds of market participants

like you announced OMO and if you buy government securities at a price it becomes a yield signal if

10-year yield is 660 and RBI decides to do OMO at 6 half it tells market that RBI is not comfortable with 660 10-year

yield and it should settle at 6 while RBI has announced OO in press conference they have mentioned that OMO is not yield signal it is only liquidity

management tool so I am conducting auction whereby I'm buying at lower than the market yield but it is only for providing liquidity don't consider it as

a yield signal the entire impact of OMO disappears because of such communication and which is Yields have gone higher

in the debt market. Income and arbitrage fund of fund continues to be appropriate for high taxpayers.

After two years of investment in growth plan of income and arbitrage fund of fund, your tax rate comes down to 12.5%.

In all other forms of debt investment, tax rates will be at slab rates, highest being 39%.

Effectively 12.5 versus 39 is a no-brainer.

This one we are market leader with almost 7,000 cr of AUM.

Do share it with your HNI clients.

gold. We have been bullish since March 20.

In social media, you have seen my old clips being circulated saying that Nilles by didn't advocate investment in

gold. Some of our peer group also

gold. Some of our peer group also circulate those kind of clips.

But please remember to judge fund manager based on monthly market outlook or annual outlook or our

allocation in asset allocation fund.

Since 2020 we have been allocating into gold in our asset allocation fund and we have started allocating silver

somewhere in mid 2025.

Our allocation to silver is one of the highest in entire industry.

So my only submission to you and your client.

Please don't spread a short video clip from a 10-year-old prediction

and rely on that.

We have many people who are jealous of our success in industry outside of industry.

There are many influencers who are jealous of us and hence continue to make this propaganda.

Ultimately this will also influence your customer.

They are not propagating mutual fund.

They are propagating their own advisory and you have recently seen someone getting fine 500 cr plus

I doubt if there is single mutual fund distributor who after providing return to investor earns 500 cr in commission and this guy who would have probably not

earned anything for their customer certainly he didn't earn for himself is getting that kind of money. This is the power of social media and which is why

we need your support in sharing our outlook, our annual outlook, our presentation and our asset allocation

fund allocation to convince client what our view is in terms of gold and silver. There has

been phenomenal run.

Probably this is driven by the fact that there is limited mining opportunities in gold, little higher in silver but compared to demand still getting

restricted.

The central banks continue to buy almost thousand tons of gold almost as much as what Indian and Chinese housewives are buying.

There is also uncertaintity because of US policies, geopolitical risk. Whenever it goes up,

geopolitical risk. Whenever it goes up, it benefits precious metal.

And we have seen in advanced economies a large portion of their reserves in gold the emerging markets like India, China, Brazil, Russia is substantially

lower.

We believe over a period of time emerging markets allocation to gold as a percentage of FX reserves will meet first global average and eventually

advanced economy average as long as central banks are buying gold and there is no manufactured gold leap grown gold prices should remain supported doesn't

mean that last year kind of return will come but still it should outperform fixed income.

Will there be rumors about gold and silver? Undoubtedly, yes.

silver? Undoubtedly, yes.

People believe the unofficial purchase of gold by China is 5 to 10 times more than their official purchases.

IMF gives a C grid for not revising GDP base year but to China IMF cannot say anything even though their data is wrong

by five to 10 times.

The other thing which could probably push gold and today we met a gold financing NBFC 10 years back pledging gold to borrow

loan was distress you go and pledge famil family's gold today it's becoming part and parcel of business pledge wife's jewelry take a loan

Start sell the fat and get the jewelry out.

Not all over India but certainly in Gujarat people will pledge gold to take money to set up kite and matcha factory.

[clears throat] On silver supply has been consistently below the demand for last almost 5 years and the

gap will continue this year as well.

This also is supporting silver prices.

The demand for silver is mainly coming today from industrial purposes but there are rumors that Saudi central bank

Russian central bank are buying silver through fronts. It's not officially

through fronts. It's not officially disclosed but people estimate that this

large buying is done by central banks.

The gold silver ratio is now trending towards historical average.

Our view for a while in last 6 8 months was that silver momentum is strong and we should overweight silver over gold.

Now our view is becoming neutral towards gold and silver. The

silver gold ratio is coming to its historical leverage. Now [clears throat]

historical leverage. Now [clears throat] there's nothing much to choose between silver and gold. Our outlook remains

positive but probably after recent rally in silver, gold and silver returns should be nearer to each other rather than having a wide gap.

Obviously when you are investing in gold and silver please remember there's no intrinsic value in this precious metal.

No bonus, no rights, no cash flow, no dividend.

It's a perception of value. Hence, we

always say it should be a restricted amount of your portfolio. You can't put 100% in

your portfolio. You can't put 100% in gold and silver in our opinion. Of

course, if your risk permits, go ahead and do it. But it will be a high risk call. So, gold and silver positive

call. So, gold and silver positive outlook as long as central banks buy every month. Please see our monthly

every month. Please see our monthly outlook to figure out whether central banks are buying or not. If there is lab grown gold, silver, please dump all your

gold and silver. The prices will come down like lab grown diamond and please invest with limit of your portfolio in gold and

silver because it's perception of value.

There's no fundamental value like a stock.

Mutual fund investments are subject to market risks. Read all scheme related

market risks. Read all scheme related documents carefully.