Global Markets
Market Corrections & Investor Uncertainty: Year-to-date, major global indices have faced significant downturns, with 9 out of 15 experiencing corrections in the past month. U.S. markets have been hit hardest, with an average 5.5% decline across major indices and a $3.5 trillion drop in market capitalisation over 15 days, driven by geopolitical tensions and trade disputes.
Trade Policy, Inflation & Manufacturing Slowdown: U.S. trade battles with China, Mexico, and Canada, along with impending steel and aluminium tariffs, are impacting market sentiment. Inflation remains sticky at 3%, forcing the Fed to maintain higher interest rates, further pressuring growth.
US Slowdown? Heightened geopolitical tensions and policy shifts in 2025 have led to a surge in economic uncertainty, with the global Trade Policy Uncertainty Index reaching levels last seen during the COVID-19 pandemic. Investor confidence has weakened amid concerns over U.S. economic policies, while policy changes in Europe and China could have significant implications for global growth with both economies projected to grow faster than the US in the coming two years, indicating outflows towards different markets from the United States.
Macroeconomic View - Strong Fundamentals
Consumption leading to recovery in GDP Growth: While private consumption growth rate picked up on back of strong kharif output and revival in rural consumption, Government consumption saw acceleration in growth on back of increased Government spending in Q3. Although manufacturing sector growth remains below par, the sector saw meaningful recovery in Q3 compared to the previous quarter.
Stable Government Finances with Strong Capex Focus: The government remains committed to higher capital expenditure, expected to meet revised estimates despite an initial slow start. The fiscal deficit target for FY26 is set at 4.4% of GDP, down from 4.8% in FY25, and is likely to be achieved.
Trade Deficit Marginally Higher but Likely Rangebound: India’s trade deficit widened slightly in Jan'25 as exports declined faster than imports, driven by lower petroleum and engineering goods exports. While non-oil, non-gold imports picked up, overall trade dynamics remain stable. Strong services exports should keep the current account in check, but restrictive trade policies and trade war risks will shape the medium-term outlook.
India’s growth outlook remains positive, supported by policy continuity, PLI benefits, global supply chain shifts, rising infrastructure investment, and a potential pickup in private capex. Additionally, income tax relief and lower borrowing costs are expected to boost private consumption.
Macro View - FII Flows
Market Correction Nearing Historical Median: The BSE 500 has corrected 18.3%, exceeding the historical median correction of 14.7%, indicating a possible trend reversal. However, further corrections may occur before stability returns.
FII Outflows Follow Historical Patterns: Foreign institutional investor (FII) outflows during global crises, including 2008 (GFC) and 2022 (Russia-Ukraine war), were followed by inflows in the successive year, suggesting a potential reversal ahead.
Earnings as a Key Market Driver: The Q4 earnings season will be crucial in determining near-term market direction, alongside continued FII activity and geopolitical developments.
Indian Equities - February Snapshot
Continued Market Downturn: Major Indian Indices saw another month of negative returns with broad market indices falling by an average of 4.2% and sectoral indices falling about 2.4% on average, with February being the fifth consecutive month of negative returns.
Global Uncertainties & Trade Tensions: Renewed fears of trade restrictions and tariffs, along with potential retaliatory measures by other economies, have increased uncertainty for Indian exports and global trade-dependent sectors. This has particularly impacted on IT, auto, and select manufacturing industries, adding to market volatility.
Valuation Correction Amidst Slowing Growth: After hitting record highs, Indian equities were trading at elevated valuations, making them vulnerable to a pullback. Slowing economic growth and downward revisions in corporate earnings forecasts led investors to reassess risk premiums, triggering a broad-based correction.
Foreign Outflows & Weak Sentiment: Concerns over global monetary policy, geopolitical risks, and India's stretched valuations have led to sustained foreign portfolio investor (FPI) outflows. The weakening rupee and cautious domestic institutional flows have further amplified selling pressure across equities.
Indian Equities - Good Time to Enter?
Sectors Trading at a Discount: Some key sectors are now trading below their long-term averages, indicating potential value opportunities. Private banks (forward P/E: 2.2x, -12.0% discount) and automobiles (17.7x, -11.1% discount) are among the most undervalued sectors. FMCG is also slightly below its LTA, while PSU banks remain at fair value. These sectors could see renewed investor interest if earnings visibility improves. Meanwhile, sectors like cement (+38.4% premium) and utilities (+28.6% premium) continue to trade at stretched valuations.
Broad Market Indices Reverting to LTA Valuations: The recent market correction has driven valuation multiples closer to their historical norms. The NIFTY 50's forward P/E is now at 18.4x, slightly below its historical median of 20.8x. MidCaps and small caps have seen a sharper derating, with their forward P/Es at 23.1x and 16.7x, respectively, compared to their historical medians of 34.5x and 34.0x. This suggests that valuation excesses are normalising, but further adjustments could continue if earnings growth remains weak.
Indian Equities - Earnings Forecast
Forward Multiples Indicate an Earnings Upgrade in Most Sectors: Analyst consensus estimates indicate strong earnings growth across most sectors, with an average expected increase of 24%. Even after factoring in the impact of US tariffs, sectors remain undervalued relative to their forward PEs, implying an adjusted growth rate of 12%.
Stock Selection and Sector Allocation Key for Gains: With sectors showing varied earnings resilience post-tariff impact, targeted stock selection and strategic sector allocation will be crucial. Investors should focus on undervalued sectors with strong earnings visibility to capitalize on market opportunities.
Indian Equities - House View
We maintain a bullish stance on equities, expecting an earnings upgrade over the next year, driven by strong domestic consumption, demand from Kumbh Mela, and government-led reforms and tax cuts. These factors should support corporate earnings growth and market sentiment.
Tactical Allocation: In the short term, we favor large-cap and multi-cap allocations for stability and earnings visibility, while waiting for mid-cap and small-cap valuations to become more attractive. As broader market corrections bring valuations in line with historical averages, selective opportunities in mid and small caps will emerge.
Fixed Income - Key Events
RBI Eases Liquidity & Interest Rates: The RBI infused liquidity through a $10 billion dollar/rupee swap and cut the repo rate by 25 bps, easing funding conditions. Additionally, the postponement of LCR norms to 2026 provides banks with flexibility to meet regulatory requirements without liquidity strain.
Inflation Trends Lower: Headline inflation fell to 4.3% in January, driven by easing food prices, with core inflation below 4% for over a year. A strong Rabi and Kharif harvest is expected to push inflation down further to 3.8% by year-end.
GDP Growth Strengthens in Q3FY25: Economic growth accelerated to 6.2% YoY, supported by robust private consumption (6.9% YoY) and increased government spending (8.3% YoY). Consumption growth is projected to reach 9.9% in Q4, signalling continued strength.
Currency & Global Trends: The rupee depreciated by 1% but is showing signs of stabilisation. Meanwhile, US treasury yields fell by 35-40 bps as the Fed’s balance sheet reduction nears its end by June, reflecting slowing US growth.
Fixed Income - House View
We remain bullish on bonds, expecting an additional 20-25 bps rally in yields over the next 3-6 months, supported by positive demand-supply dynamics and expected RBI rate cuts. Despite recent liquidity measures, further actions may be needed to ease tight liquidity conditions. Globally, US rate cuts of 50-75 bps and slowing economic growth could support fixed income markets.
Strategic Positioning: We maintain an overweight duration stance across our funds, with a higher allocation to government bonds given favourable demand-supply trends and potential Open Market Operations (OMOs). Our focus remains on 7-10 year G-Secs and high-rated corporate bonds, balancing quality and duration to capture capital gains as yields decline.
Gold Outlook
Gold prices have reached an all-time high, with spot prices nearing $3,000 per ounce mark. This surge is primarily driven by escalating geopolitical tensions, notably between the U.S. and Ukraine, and the implementation of new U.S. tariffs on major trade partners, including Canada, Mexico, and China.
Central Bank Demand Support Prices
Central banks, particularly in China and India, have been increasing their gold reserves, providing structural demand support. The World Gold Council has noted that global central bank purchases of gold remain at multi-year highs, as nations seek to diversify away from the U.S. dollar.
The escalation in gold prices is further fuelled by persistent geopolitical tensions and economic challenges. Concerns over potential U.S. recession, declining consumer confidence, and rising inflation expectations have heightened gold's appeal as a safe-haven asset. Additionally, ongoing geopolitical conflicts, such as those in Yemen and Gaza, coupled with trade uncertainties stemming from tariff policies, have contributed to market volatility, prompting investors to seek refuge in gold.
Gold - House View
We maintain a bullish stance on gold in our strategic asset allocation, as macroeconomic uncertainties, geopolitical tensions, and central bank demand continue to support higher prices. Given its role as a safe-haven asset, gold remains a crucial hedge against market volatility and inflation risks.
