Reality Scores Over Sentiments

 

Reality Scores Over Sentiments

Global Scenario:

I believe 2025 will be a year of navigating turbulence rather than one of rapid GDP growth. Global economic expansion is expected to remain subdued, with the U.S. projected to grow at a modest 2.0%, the Eurozone lagging at 0.9%, and China’s growth forecast at 4.2%—well below its historical average.

Persistent inflation, fuelled by higher fiscal spending and potential tariff hikes, may limit central banks' ability to cut interest rates as they strive to balance growth and inflation control.

A few months into 2025, the sharp decline in the U.S. stock market has prompted leading Wall Street analysts to revise their bullish outlook for the S&P 500. Heightened uncertainty around President Donald Trump’s evolving tariff policies and retaliatory measures from trading partners have triggered fears of an escalating global trade war, leading to increased market volatility.

As of March 17, 2025, Wall Street’s revised year-end target for the S&P 500 is 6,667, implying a 17% advance from its current level of 5,675 (Source: MarketWatch).

The shift in Wall Street’s sentiment marks a sharp departure from late 2024, when strategists expected the market to sustain its upward trajectory following two strong years. Initially, hopes were pinned on Trump’s "pro-growth" agenda, promising tax cuts and deregulation. However, tangible policy action remains elusive, with attention largely focused on tariffs, immigration curbs, and fiscal downsizing.

Geopolitical & Policy Risks: 

The uncertainty surrounding trade policy could drive increased market volatility in 2025-26. A key trend to watch is the global shift in economic strategy—from monetary policy to fiscal policy, as governments seek new drivers of growth. With inflation still above comfort levels, central banks have limited flexibility, making fiscal measures the next battleground for economic expansion.

Indian Economy and Equity Market:

2025 has been challenging for Indian equities, marked by persistent FII selling and a steep market correction. Several factors have contributed to this downturn:

• Rupee depreciation
• High market valuations
• Earnings slowdown
• Strong dollar and rising U.S. bond yields

1)    Impact of U.S. Macros on Indian Markets : The U.S. bond yield surge is a key headwind. The 10-year U.S. Treasury yield has climbed above 4.3%, narrowing the spread between U.S. and Indian sovereign bonds to 2.24%, down from over 5% in 2022. A stronger dollar index (103 as of March 17, 2025) has led to sustained FII outflows, further pressuring the Indian market.

The big question: Why should FIIs invest in a high-valuation Indian market when U.S. bonds offer a risk-free return of 4.5%?

2)  Valuation Concerns: At Nifty 22,500, the Indian market is trading at 20x FY26 estimated earnings, well above the long-term average of 18x. Given the resilience of the U.S. economy and the relative affordability of other emerging markets, FIIs may continue to reduce exposure to Indian equities.

3)    India’s Long-Term Growth Potential: Despite near-term headwinds, India's economic trajectory remains compelling:

• IMF projects India’s GDP to grow at an average of 6.1% over the next five years, making it the world's third-largest economy by 2027 after the U.S. and China.
• The economy is expected to double from $3.5 trillion to $7 trillion by 2030.
• India’s manufacturing sector needs to transition from import substitution to export-led growth to sustain this momentum.
• However, a slower-than-expected global recovery and geopolitical disruptions could weigh on India’s export outlook. To counter this, India must harness its domestic strengths to drive sustainable growth.

4)   The Role of Capital Markets & Policy: India's capital markets play a critical role in channeling savings into investments, ensuring financial stability, and boosting investor confidence. However, while domestic institutional investors (DIIs) have cushioned the impact of FII outflows, they may not be able to fully counterbalance prolonged foreign selling.

Fiscal policy will be crucial in shaping India's economic trajectory. The government must:

• Balance fiscal discipline with growth-oriented spending
• Prioritize capital expenditure in key infrastructure projects
• Encourage state governments to efficiently utilize allocated funds

5)  India’s Near-Term Outlook:  India’s GDP is expected to grow between 6.7% and 7.3% in FY 2025-26, albeit with downside risks. Key challenges include:

• Geopolitical uncertainties impacting trade and supply chains
• Delayed global recovery affecting exports
• Inflation concerns, although expected to moderate with a strong agricultural output and proactive policy measures

Despite these risks, India's GDP gap versus pre-COVID-19 levels is closing, and the economy is gradually regaining momentum.

Investment Strategy for Indian Equity Markets:

1. I personally believe that India has bottomed out, and economic growth will accelerate over the next six months. Additionally, Donald Trump’s policies are likely to stabilize, reducing global market uncertainty.
2. Investors should consider deploying capital in tranches, strategically buying equities with every 5 % market decline to position themselves ahead of the recovery.
3. The approach should focus on bottom-up stock picking, prioritizing strong fundamentals over purely technical indicators, while also factoring in macro-economic trends.
4. In these uncertain times, smart and informed investing will be crucial. A well-researched, fundamentals-driven strategy can help investors navigate volatility and build capacity for strong returns over a one-year horizon.

Author:

Thakur Ajit Singh 

Founder 

Graded Finacial Services | Quick Turtle - An Executive Placement Firm

Trainer | Management Consultant.

Cell: 8169810833