Over the past 4 to 5 months, the domestic equity market has remained bearish, following a sell-on-rally pattern. However, in the last two trading weeks, market movements in India have shown signs of improvement. Since this shift is still in its early stages, it is too soon to determine whether the trend is evolving from a sell-on-rally to a buy-on-dip strategy. We assess that the domestic market environment has become more favourable, supported by more balanced valuations and a strong long-term economic outlook. The Union Budget has stimulated consumption, while capital expenditure is expected to sustain long-term growth.
The budget’s actual outcome is much better than thought. The 0.3% of GDP tax cut, which is 3% of gross tax income of the govt., to the salary payers is expected to instigate higher consumption in FY26-27 and have a multiplier effect for the economy in the medium-term. Although the Capex plan falls below the long-term average, it is unlikely to impact the long-term outlook for allied sectors, as Capex is expected to regain focus in FY27. Furthermore, Capex growth for FY26 is projected at 10.1%, surpassing the actual 7.3% growth in FY25, which is not expected to hinder year-on-year order growth. A sharp rise in consumption and continuity of capex is a win situation for the domestic economy. Despite the positive framework of the budget, the market was unable to gain due to disruptions in the global landscape following the announcement of “Trade War”. The imposition of 25% tariff on Mexico and Canada, along with an additional 10% on China, unsettled global markets. However, as the measures were put on hold—except on Chinese—markets rebounded, though global sentiment remains cautious. The global market view is coming on to a perspective that Trump’s ideology is to use Tariff as a warning weapon. Going forwards, if the market fixes Trumponomics as an appearance norm of US policy, the global market may have a breather with an upside in trend based on the economic data and rate policy.
It is widely anticipated that the ongoing tariff provoked by the U.S. will yield no gains to anybody. On the contrary, such measures pose a serious threat to the global economy, potentially prompting equity investors to seek safer assets. The global economy was thriving under the growth of global trade, which is under threat of protectionism. It will make the world less efficient and elevate inflation & interest rates. Based on the support of world institutions, leaders, and threat of contour measures, protectionism is not expected to flourish.
Additionally, RBI’s measures to increase financial liquidity, by OMO, and rate cuts are supportive for the domestic economy. Expectations are developing that RBI monetary policy will be more accommodative under the new governor, Sanjay Malhotra. This is backed by the fact of moderation in economic growth, 5.4% Q3FY25 real GDP growth, reduction in inflation, and elevated bank rate, which held at 6.5% for the last 2 years. RBI has not cut the rate in the last 5years. Currently, the market expects a total of 50-100bps cuts in 2025 depending on the volatility of INR, which has depreciated at a rapid rate in the last 3 months to ₹87.5. It will also depend on the rate cut policy of the Fed, which is currently sceptical due to trade war risk.
Although the economic environment remains conducive to future economic growth, the stock market remains sceptical, as earnings growth is perceived to be subpar compared to historical trends. Current valuations, while lower than last year, do not appear fully justified given the prevailing low earnings trajectory. In Q3FY25, broad market PAT growth is estimated at 9% while one year forward P/E is more than double at 19x. However, Q4 is likely to be better on QoQ, led by an increase in government & moderation in external inflation. For FY26, the earnings growth forecast is 12-13% compared to 8-9% for FY25. If earnings growth reverts to the long-term average of 15%, it could signal a potential recovery in equity market trends over the course of the year.
Article was first published in Live Mint.
