This month’s correction in the stock markets has prompted many of us to reevaluate our portfolios. Some investors are considering selling equities, as we face the first sustained correction along with negative news flow regarding earnings and economic growth. On the other hand, those who have been cautious during the rally see this as a chance to buy the dip.
Both approaches require us to make predictions about an inherently unpredictable future. For those looking to sell, there’s the question: what if this is just a minor blip, and the market continues to absorb negative news as it has in the past? Conversely, for those inclined to buy, what if this signals the start of a sustained economic and earnings slowdown amid elevated valuations, resulting in further market corrections? The answer remains uncertain. However, here are the fundamentals that outline the current stance-
The Indian Economy
1. Global Oil Market and Geopolitical Landscape: The Middle East region supplies about 30% of the world's oil, with critical infrastructure located in geopolitically sensitive areas, notably the Strait of Hormuz. Ongoing conflicts, particularly involving Iran, threaten regional stability. A blockage in the Strait of Hormuz could disrupt 20% of global oil supplies, potentially leading to increased oil prices and broader economic disruptions.
2. Impact on the Indian Economy: Subdued demand from China helps lower global oil prices, benefiting India—an economy that imports 80% of its oil needs. A 20% drop in crude prices could save India approximately $13 billion for every $10/barrel decrease. The Reserve Bank of India (RBI) has added $67 billion to foreign reserves in 2024, strengthening external finances.
3. Economic Growth Forecast: After a robust recovery post-pandemic, India's GDP growth is expected to decelerate to 6.1% in FY25, down from 8.2% in FY24. Earlier forecasts had anticipated 6.5%. 1QFY25 recorded a YoY growth of 6.7%, below the RBI's projection. The outlook for the remainder of the fiscal year suggests growth will range between 5.7% and 6.2%. For FY26, a slight stabilisation is anticipated at 6.3%.
4. Inflation Outlook: Inflation is expected to remain contained, with a headline CPI forecasted at 4.5% for FY25. Recent figures show food inflation at 5.6%, while core inflation remains stable at 3.4%. Inflation may rise slightly in the second half of FY25, but it is likely to stay within the RBI's comfort zone, potentially leading to rate cuts by February 2025 if growth remains below 6%.
5. Industrial Sector Performance: The industrial sector exhibits mixed performance. The manufacturing sector has gained momentum, growing 4.6% YoY in July 2024. However, mining and electricity sectors have experienced slower growth.
Equity Market
Earnings Growth: The Nifty-50's earnings growth is expected to moderate, led by sectors like BFSI, Healthcare, and Utilities. Earnings are projected to grow, but at a slower pace compared to the high base in FY24.
Valuation Concerns: Indian markets continue to trade at premium valuations compared to their global counterparts. The Nifty-50 is currently trading at 21.5x its on year forward earnings, which is 5% higher than its historical average of 20.4x. Notably midcaps and small caps is currently trading at 59% & 12% premium to large caps. Despite this the investor sentiment remains high due to
. Nifty's PAT CAGR of 12%-25% over the last 3, 5, and 10 years
• Strong government and corporate balance sheets
• Buoyant domestic capital flows
Indian markets continue to trade at premium valuations compared to their global counterparts, with the Nifty-50 at 21.5x forward earnings—5% above its historical average. Midcaps and small caps trade at 59% and 12% premiums to large caps. Investor sentiment remains high, supported by a 12%-25% PAT CAGR over 3, 5, and 10 years, strong balance sheets, and robust domestic capital flows.
Investment Strategy: Given uncertainties in the global context, a balanced and resilient investment strategy is advised, with staggered investment approaches suggested for equity allocations.
Current Scenario: With GDP growth stabilising and inflation trending lower, the Indian economy appears to have entered a "Goldilocks" phase. Improving Forex reserves and stable yields provide macroeconomic comfort.
Volatility Risks: Geopolitical tensions and inflation risks may cause short-term volatility in bond yields. Despite this, long-term trends suggest a softening trajectory for yields.
Investment Approach: Core fixed income allocations should focus on duration, using both active and passive strategies to capitalise on evolving market conditions while managing short-term volatility.
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