Domestic growth indicators suggest a slowdown, particularly in consumption-driven sectors, with urban demand showing signs of weakness. This softening trend raises concerns about the pace of recovery, as consumer spending remains flat. Market valuations remain challenging, and without a significant rebound in corporate earnings, markets are expected to remain in a tight range.
The political uncertainty around elections in some states along with muted corporate Q2FY25 earnings have made the outlook of Nifty earnings a little weaker. However, the government's focus on fiscal expenditure and private sector capital expenditure (capex) is expected to provide economic resilience in the near term. The combination of fiscal support and private investment will be critical in sustaining momentum.
Despite concerns about weaker consumption and slower growth, India's long-term economic outlook remains positive, driven by the expectation of a capital expenditure-led growth cycle. The broader market is currently underperforming, with FPIs exiting but is expected to closely watch the fairly counter balanced by flows from DIIs.
The US economy's outlook also contributes to global market uncertainty. With US yields rising following recent Fed actions and post the election of Donald Trump as the US President, speculation about the potential return of inflation is increasing, further dampening sentiment. The policy shifts post the new government coming into power, and any resulting debt issuance will be closely watched for as it could push long-term interest rates higher, may have inflationary pressures, which would not be a good sign for Indian markets.
Given the current market dynamics, the investment environment is likely to be a “stock-picker's market,” where selecting the right companies will become crucial. Companies within the same sector could report varied financial results, making a tailored approach essential. Our strategy will continue to focus on identifying companies using a “bottoms 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
In the just concluded US Presidential election, Donald Trump has made a remarkable comeback and will be reoccupying the White House for the second time. If October 2024 was a month of unexpected surprises, global markets may likely need to be prepared for heightened macro uncertainties and greater volatility post Trump’s resounding return to the US Presidency.
With the benefit of hindsight, global bond markets perhaps had a “premonition” of a Trump 2.0 Presidency to explain their behaviour in October as contrary to expectations, global bond yields rose significantly (10-year US Government Bond yield increased 0.5% to 4.28% in October 2024) even though the US Central Bank (Fed) delivered its first rate cut since the Covid-19 led crisis era in the September Federal Open Market Committee (FOMC) meeting and “promised” more rate reductions over 2024 and 2025.
This week’s FOMC meeting expectedly followed up on the September 2024 meeting’s 50 bps (100 bps = 1.0%) rate cut action and reduced the policy rate by 25 bps to the 4.50% - 4.75% target range. However, global markets are expected to remain focussed on the incoming Trump 2.0 Presidency, which is expected to bring a fresh set of challenges for the world to navigate. Emerging markets could face headwinds from the so-called “Trump trade” as they stand to lose from his “America First” economic agenda. Trump’s pre-election “promises” include levies on US imports, tax cuts, restrictions on immigration etc. and this could lead to increased protectionism, upend global trade, see a surge in inflation and expand the US fiscal budget deficit.
A higher US inflation trajectory would imply lesser quantity of policy rate cuts by the Fed, while an expansionary fiscal policy could lead to an increase in US government bond issuance and potentially higher bond yields, especially at the longer end – a double whammy which has the possibility to undermine the ability of emerging economies looking to reduce their borrowing costs. Moreover, with retaliatory actions (trade wars?) expected from the affected exporting countries, global trade which already is witnessing fragmentation could be at further risk. Thus, volatility will remain a key theme over the next few years.
Locally, the Reserve Bank of India (RBI) expectedly kept policy rates unchanged at the Monetary Policy Committee (MPC) meeting in October but changed the policy stance to neutral from the previous “withdrawal of accommodation” stance. Despite the “softer” than previous policy stance, India witnessed foreign portfolio outflows in Equities as well as Debt. As a result, benchmark equity indices closed lower by ~6% in October while the 10-year generic bond yield hardened by ~10bps to 6.85% during the month.
We continue to maintain our assessment that the RBI should be able to reduce the policy repo rate in February 2025 (base case). We also uphold our expectations of a cumulative 50-75 bps easing by the Central Bank, but we now expect the move to the terminal policy rate in this lower interest rate cycle to happen over a longer time frame than envisaged previously.
We expect the benchmark 10-year government bond (GSec) to trade in narrow 10-15 bps range from the current levels (New 10-year GSec trading @ ~6.78%) over the medium term and expect it to head towards 6.50% when significant policy rate cut expectations from the RBI get built in. Furthermore, with the impending rate cut cycle expected to be shallow, fixed income funds are expected to deliver a mix of accrual income and capital gains. Thus, strategies focused on delivering total returns may realize superior risk adjusted returns as compared to non-market linked fixed rate alternatives in the current environment.
Source: RBI, Bloomberg, CCIL, MOSPI (as on 31st October 2024)