The Indian stock market faced significant challenges recently, influenced by both domestic and global factors. The interplay between slowing GDP growth, shifting foreign investments, and political events has created a biased economic landscape for the national market.
We expect this uncertainty to resolve as earnings growth returns and Trump’s policy framework emerges in 2025. Regarding earnings, we expect an improvement in trend on a QoQ basis from Q3. This is because central and state budgeted expenditures, which were below forecast in H1 due to the national and eight state elections, have just started to spur. Earnings growth is forecasted to rise to 10% to 12% in H2 from 6 % in H1.
Regarding ‘Trumponomics’, clarity will emerge in the next 2 quarters. Trump is expected to use tariffs as a threat to gain benefits. It is likely to be a country-wise game in which there will be winners and losers. Generally, it is feared to be inflationary, de-globalising, and strengthening the dollar in the medium-term. However, it is unlikely to be as bad for India compared to the rest of the world. An economic hit for China will be a gain for India. Some sectors could be winners due to improvement in the US economy and depreciation of INR. If India is able to extract more economic and alliance benefits with the US, we will have an advantage.
Weakening market
Over the past two months, the Indian stock market has experienced a downturn, with funds reportedly shifting toward markets like China and Japan. This shift is partly due to the lag effect of the ‘Yen Carry Trade’, which impacted the global market in July. Despite positive global market conditions, the Indian market is performing on a weak note. The RBI’s revised Q2 GDP growth estimate, lowered from 7.2% to 7.0%, has further dampened market sentiment. Market surveys now estimate Q2 growth to be between 6.4% and 6.8%, indicating a potential downgrade for FY25 GDP growth.
The decline in Q1 and Q2 GDP earnings growth stems from reduced government spending and weakening urban demand. Global demand has also slowed in 2024 amid hyperinflation and rising interest rates. These factors, combined with India’s premium valuations, have accelerated FII selling. The Nifty50’s weak Q1 & Q2 earnings growth has prompted downward revisions of FY25 earnings growth forecasts from 15% to 8-10%.
Trumponomics: Opportunities for India
Trump’s economic strategies aim to enhance America’s economic outlook, potentially at the expense of the rest of the world. This could lead to a reduction in foreign investment and increased currency volatility. The world economy may slow due to deglobalization, high tariffs on trade, and geopolitical uncertainty appreciating the USD as a haven currency. US yields are forecast to rise due to immigration control and high inflation led by government spending, which could lead to depreciation of other currencies, including the Indian rupee (INR).
The stronger-than-expected mandate for Trump boosted the global equity market. The MSCI World Index is up by 2.5%, led by the US market. Dow Jones is up by 5% since 4th November. The US market continues to thrive, driven by confidence in new policies that align with the “America First” slogan. Countries with significant trade deficits with the US, such as China, Mexico, Vietnam, Germany, and Japan, are expected to be most vulnerable to changes in trade policy. India, with a trade deficit of 5.8%, is at lower risk. Strong ties between Modi and Trump could also support. The China Plus policy also may throw open opportunities for India.
Protecting INR
There are concerns about the high CPI inflation of 6.21% in October. Well, that may not be such an issue, as the monthly forecast is expected to moderate in a range of 4 to 5% in November and December. Additionally, the market would not favour an RBI rate cut at this time due to a new challenge that was previously unaccounted for: the strengthening USD. If rates are cut now, the INR could face further depreciation.
Historically, the INR depreciates against the USD at a long-term annual rate of 3.2%. During the last year, the depreciation is low at 1.3%. INR is performing better than other EM currencies, and the view is that it is expected to be maintained. The strengthening of the USD will become a significant issue only if this long-term trend changes in the second term of Trump. India’s GDP is expected to grow at a real rate of 6 to 7% and a nominal rate of 10 to 12 % this decade, forecasting a strong INR.
Earnings downgrade mostly factored-in, but valuations are still high
Q2 had a muted forecast, and the actual performance is marginally lower than expected, leading to a further downgrade in earnings. Nifty 50’s PAT growth was forecasted to grow by 8.5% YoY, while the current actual growth is only 6.5%. Revenue growth was modest at 2.8% YoY, falling short of the 4.2% forecast and significantly lower than the 7.6% YoY growth observed in Q1. This has led to a severe market fallout as investors adjust to the reality that India can no longer trade at the premium valuations it enjoyed over the past few years.
In Q1, the PAT growth was 6.7%, and Q2 is similarly suggesting that H1 growth will be around 6%. Despite the weak H1 earnings, there is optimism that H2 will be much better due to a rebound in the lost government spending of H1. However, analysts have cut the EPS forecast for FY25, reflecting cautious sentiment. The current valuation of India has reduced to a P/E of 21x on FY25 and 18x on FY26, making it attractive for long-term investors to start accumulating quality stocks.
Balancing your portfolio
Given the current economic and market conditions, a diversified portfolio remains crucial. Investing in multiple asset classes, including equities, bonds, gold, and cash, can enhance diversification and mitigate risk. Large-cap stocks are preferred over mid-caps due to their relatively stable performance and lower valuation risks. Corporate bonds with decent coupon rates remain attractive, providing a steady income stream and reducing overall portfolio volatility. Gold continues to be a positive investment due to central bank demand, INR depreciation, geopolitical risk, and high inflation. Cross border exposure through ETF and MF schemes in China and the US market will add depth to the portfolio. High dividend payout companies and instruments like REITs & INVITs are good for passive investors.
Sector focus
Strengthening of the US economy will support sectors like IT, Pharma, Textiles and Chemicals. Domestic demand-driven sectors, particularly consumption stocks, can outperform due to stable demand and in anticipation of decline in input costs. Large FMCGs are trading below long-term valuations due to the disruptive last two years eroding demand. They can do well due to a reduction in food costs, good climate, and a rebound in government spending. Other promising sectors include infrastructure, new-generation companies, manufacturing driven by a stable domestic economy and the positive impact of the China Plus strategy on PLI. Large private banks and NBFCs are also promising, especially as they are trading below long-term average valuations.
In short, while the market faces short-term volatility and risks, the long-term outlook remains positive. A diversified portfolio with a focus on large-cap stocks, bonds, gold, cross country, and dividend paying instruments can help traverse the uncertainties and capitalize as the domestic economy grows in the long-term.
