Equity Market Outlook
A downward trend in both the economic and corporate sectors, which continues to unfold. In Q2 FY25, earnings miss outnumbered earnings beats by more than a factor of two, with the depth of earnings revisions heavily skewed towards the misses. GDP growth for the quarter ending September 2024 fell to 5.4%, a seven-quarter low, missing estimates of 6.5% by a significant margin. While macroeconomic and corporate earnings data are important indicators, many of these below-estimate figures are already priced in. It looks like it is now the right time to take a more optimistic view on select segments of the market.
Liquidity conditions have improved, with Foreign Institutional Investors (FIIs) turning net buyers last week of November 2024 after eight consecutive weeks of net selling, marking a $0.5bn inflow into the Indian markets. This shift suggests that the selling pressure from FIIs has eased, providing a potential positive catalyst for equities in the coming weeks.
As we approach the end of 2024, we are now beginning to see early signs of a revival. Market sentiment has turned negative, offering opportunities for selective positioning. We believe the market has the potential to recover and gradually move upwards from here upon receipt of fresh good signs, which we expect post the current wedding and holiday season.
Regarding macroeconomic factors, US yields have risen following recent Fed actions and the election of Donald Trump, which has sparked speculation about a potential return of inflation, further dampening sentiment. Policy shifts under the new government, along with any associated debt issuance, will be closely monitored.
Domestically, growth indicators suggest a slowdown, particularly in consumption-driven sectors, with urban demand showing signs of weakness. However, India's long-term economic outlook remains positive, driven by expectations of a capital expenditure-led growth cycle. While the broader market is underperforming, inflows from domestic institutional investors (DIIs) continue.
In terms of consumption, the healthy Kharif sowing and a strong outlook for the rabi season should support rural demand, while the pace of urban demand slowdown, alongside the festive and wedding seasons, remains a key monitorable. The Nifty 50 has corrected by around 8% from its 52-week high, following a bull run from March 2023 to September 2024. This correction reflects a natural pullback after the markets reached the upper end of their range.India is in a structural bull run and is expected to grow from here. Stock pickers market and staggered way investors should invest and generate wealth to see through volatility. Our strategy will continue to focus on identifying companies using a “booms up” approach—selecting those with the potential to outperform even in challenging conditions. Investors could opt for a staggered mode of investment through the SIP route to even out volatility
Debt Market Outlook
Market sentiment has recently been influenced by the U.S. election results and renewed geopolitical tensions. A Republican sweep in the elections drove a robust surge in the U.S. Dollar, with markets pricing in a more extended Fed tightening cycle. This triggered a sell-off in U.S. Treasuries and a strong appetite for U.S. equities and other risk assets throughout November.
In the near term, we expect U.S. risk sentiment to remain buoyant, supported by the prospect of higher corporate earnings due to proposed tax cuts and a pro-business policy agenda. On the monetary policy front, the Federal Reserve faces the challenge of navigating the growth-inflation outlook amid the potential for fiscal expansion. So, we expect sustained pressure on the U.S. bond markets due to several factors: 1) a growing supply of U.S. Treasuries for domestic investors, 2) heightened fiscal slippage and related supply risks, and 3) elevated inflation from increased fiscal stimulus and potential tariff hikes, limiting the potential for substantial rate cuts.
With growth remaining steady and inflation showing signs of stabilizing around the BOJ’s 2% target, the central bank’s continued inaction could lead to further weakness in the JPY. This would, in turn, pose significant upside risks to imported inflation.
The “status quo” policy rate decision as well as continuation of the policy stance in the last MPC meeting was on expected lines. The tone of the policy has been balanced even as it retained their focus on last mile disinflation. The Reserve Bank’s anti-inflationary monetary policy stance has been a crucial factor in bringing about a significant disinflation. It is necessary to draw on the flexibility provided by the neutral stance to wait and monitor the incoming data for confirmation of the decline in inflation. At this critical juncture, prudence, and practicality demand that we remain careful and sensitive to the dynamically evolving situation with all its complexities and ramifications. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses.
The RBI has kept the option open for potential rate cuts soon, contingent on the stability of geopolitical tensions, external spillovers, and weather conditions. Instead of speculating on the possibility of a rate cut cycle beginning in February 2025, markets needs to focus on the terminal policy rate. We anticipate a gradual rate cut cycle of 50-75 basis points in the current low-interest-rate environment, with the terminal repo rate expected to settle in the between 5.75% - 6.00% range.
In the current environment, where policy rates are at their peak and are expected to decline in the coming months, actively managed duration debt funds may offer value to investors. We anticipate these funds may deliver attractive risk-adjusted returns in comparison to non-market linked fixed-rate products.
Source: RBI, Bloomberg, CCIL, MOSPI (as on 29th November 2024)