Mar 10, 2025
• India’s macro and valuations are improving, but equities may remain under pressure in the absence of visibility of earnings recovery.
• Large-cap valuations appear fair, while mid-and small-cap valuations remain above historical averages despite recent corrections.
• Remain underweight on equities, with a preference for large caps.
• Overweight gold amid strong central bank demand, trade policy uncertainty, and sticky US inflation.
• US trade policy disruptions are expected to drive global market volatility.
Cyclical Slowdown Not Structural
Indian markets have seen a significant correction in recent weeks, raising concerns about a potential structural slowdown in the economy. However, the current downturn appears cyclical and is primarily driven by two key factors: a temporary decline in government capital expenditure around the election cycle, and the RBI’s regulatory tightening on unsecured credit. These factors have led to subdued corporate earnings growth so far this fiscal year. Given elevated valuations, any negative earnings surprise was bound to trigger a market correction, particularly following strong returns in previous years.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns only
Government spending has increased in recent months, and the budget has reduced personal income tax rates to support urban demand. Additionally, the new governor is taking a more consultative approach and may ease regulatory constraints. However, these positive changes could take time to reflect in corporate earnings. Unless there is clear visibility in earnings recover, we expect markets to be edgy, even as long- term fundamentals remain strong. But more on this later.
Global Macro Update
Since taking office, President Trump has made tariffs a key policy tool. With numerous announcements, reversals, and postponements, the situation remains fluid and complex. Here’s a summary of the actions as of this writing. The U.S. imposed additional tariff on all Chinese imports that were previously exempt, including small packages under USD 800, effective February 2025, nearly doubling the existing tariff rate. In response, China introduced 10–15% tariffs on U.S. goods in February, followed by additional measures more recently. Additionally, in February 2025, the U.S. announced a 25% tariff on all imports from Canada and Mexico, followed by a 30-day extension. As of this writing, some of these tariffs have taken effect, while others have been extended until April 2, 2025. In response, both countries have imposed retaliatory tariffs. A separate 25% tariff on all steel and aluminium imports is set to take effect on March 12, 2025. President Trump has also threatened tariffs on Europe and India.
President Trump appears to be using tariffs as a negotiation tool to secure concessions. While short-lived tariffs may cause disruptions, their economic impact could be limited. However, a full-scale trade war with retaliatory tariffs could slow growth and drive inflation higher. We’ll have to wait and see how this unfolds.
The Department of Government Efficiency (DOGE) has introduced another layer of uncertainty through mass federal workforce reduction, agency shutdowns and restructuring, and spending freezes. While these actions have caused significant disruption and concern among government employees, they have yet to yield substantial cost savings.
These policy uncertainties are already delaying corporate investment decisions, as seen in the decline of M&A and IPO activity since Trump took office. Even in the absence of an outright trade war, persistent policy uncertainty could weigh on business confidence and economic growth.
On the other hand, US inflation remains persistent, with January 2025 headline inflation at 3.0%, slightly above the 2.9% forecast. More concerning is the rise in core inflation to 3.3% (vs. 3.1% expected) and a 0.4% monthly increase. Amid ongoing inflation, consumer sentiment appears to be weakening, as reflected in the University of Michigan’s consumer sentiment survey.
US consumer confidence in decline
Source: Bloomberg, Sanctum Wealth
Persistent inflation and uncertainty surrounding trade and fiscal policies are likely to keep the Fed from cutting rates in its March meeting. Market participants continue to expect between two and three rate cuts by the end of the year.
In Europe, attention is now on a potential grand coalition between centre-right and socialist parties in Germany following the recent elections. Many anticipate a shift toward looser fiscal policy, if the coalition is stitched up, which could boost the Eurozone’s growth outlook. However, the US administration has escalated its criticism of Europe, which could result in announcements with adverse direct and indirect financial impacts.
It’s widely anticipated that China’s National People’s Congress (NPC), commencing on 05 March 2025, will unveil measures to relax fiscal policy and boost domestic demand. Although the People’s Bank of China (PBoC) continues to lower interest rates and increase its balance sheet, substantial fiscal backing is essential to rejuvenate demand and counterbalance the effects of U.S. tariffs. So far, government support to Chinese equities has been below expectations.
Global Market Update
Following an initial rally in the aftermath of the November election results, market sentiment toward US equities has weakened due to concerns over tariff-related uncertainty, inflation, and the emergence of DeepSeek. That said, US corporate earnings have remained resilient. According to FactSet, the blended year-over-year earnings growth for the S&P 500 is around 18.2%, the highest quarterly increase since Q4 2021. While the technology sector continued to drive earnings growth, its performance was mixed. For Q1 2025, more companies have issued negative EPS guidance than positive, reflecting a cautious outlook amid policy uncertainties.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in local currency terms
European equities have outperformed US equities year to date, driven by optimism over a potential resolution to the war in Ukraine and expectations of increased fiscal spending in Germany following recent elections. However, sustaining these gains would require a coordinated region-wide fiscal stimulus plan, an ambitious challenge given Europe’s economic diversity. Moreover, a unified approach will be crucial in navigating trade negotiations with the US.
Chinese equities, particularly the tech-heavy Hang Seng Index and Hang Seng Tech Index, have also outperformed year to date. The rise of DeepSeek has highlighted that Chinese tech companies are not far behind their US counterparts and, therefore, should not trade at a deep discount to US peers. However, relative to their own 10-year averages, Chinese equities, including tech stocks, are now closer to fair value. While near-term momentum may persist, long-term gains will likely be influenced by US tariff policies and China’s fiscal stimulus measures.
Given the valuation gap between the US and the rest of the world, diversifying away from US equities may be beneficial despite trade-related challenges. Positive developments in other regions present opportunities, and a diversified approach can help mitigate trade-related risks across geographies.
India Macro Update
India’s GDP grew 6.2% in Q3 FY2025, up from 5.6% in the previous quarter but marginally missing the 6.3% forecast. Growth was driven by rising rural consumption and higher government spending. GDP is expected to accelerate to 7.6% in Q4 FY2025, bringing full-year growth to 6.5%, according to second advance estimates. Chief Economic Adviser V. Anantha Nageswaran expects exports, government capex, and Mahakumbh-related spending to further boost growth in Q4.
Uptick seen in GDP growth in Q3 FY25
Source: Bloomberg, Sanctum Wealth
The rise in economic activity is also reflected in high-frequency indicators such as PMI, auto sales, air passenger traffic, e-way bills, and GST collections. India’s composite PMI climbed to 60.6 in February 2025 from 57.7 in January 2025, with the services PMI rising to 61.1 from 56.5. Auto sales grew 14.8% in February, driven by a 19% YoY increase in passenger vehicle sales.
India’s CPI inflation eased to 4.31% in January 2025, down from 5.2% in December and a peak of 6.2% in October, driven by lower food prices. However, core inflation edged up to 3.8%, mainly due to rising gold prices.
CPI inflation trending down
Source: Bloomberg, Sanctum Wealth
In its February 2025 policy meeting, the RBI cut rates by 25bps, initiating its rate-cut cycle. However, despite easing inflation, we expect a shallow cycle with only 25-50bps of additional cuts, as the RBI prioritizes stability amid global uncertainty over supporting growth. While the new governor reaffirmed the RBI’s commitment to providing liquidity when needed, the lack of concrete measures in the post-MPC press conference disappointed markets. Over the past few months, the RBI has taken several steps to improve liquidity, and we expect further support without a return to the surplus levels seen during COVID. Additionally, markets anticipate some regulatory easing following the tightening of recent years.
Indian Market Outlook
Our proprietary asset-pair model enables us to focus on key fundamental and technical parameters, ensuring discipline and mitigating emotional biases in the current market environment. The model suggests that we remain underweight equities with a preference for large caps over midcaps.
As highlighted earlier, India’s macroeconomic conditions are gradually improving. However, this may take time to reflect in earnings growth. Q3 FY2025 earnings at index levels were largely in line with muted expectations, with both revenue and PAT growing in single digits. However, more companies missed estimates than exceeded them, and forward EPS downgrades outpaced upgrades. Over the past two quarters, FY2025 and FY2026 EPS estimates have been lowered by ~4% and ~3%, respectively. Full-year FY2025 earnings growth is expected to remain in single digits, with FY2026 projected at 12-13%. This contrasts with the 18-19% CAGR in corporate earnings over the past four years. We believe further earnings downgrades are likely in the next quarter, after which they are expected to stabilize.
Q3FY25 earnings- More misses than hits
Source: Bloomberg, Sanctum Wealth
Following the recent correction, Indian equity valuations have improved. The Nifty 50 now trades below long-term averages on a trailing P/E and is closer to historical averages on a 12-month forward P/E and relative to MSCI Emerging Markets. However, valuations remain elevated on P/B, P/S, and market cap-to- GDP metrics. Given the potential for further cuts in earnings growth, the margin of safety in valuations remains limited.
Foreign investors have been favouring Europe and China over India and this is reflected in the INR 2.6 lakh crores outflow from Indian equities since September 2024 highs. Even in mid and small caps, where FPI participation is low, SIP flows are moderating. Additionally, promoters have been actively reducing their stakes, resulting in promoter ownership reaching a 22-year low as of the December 2024 quarter.
Nifty forward PE close to 10 year average while Midcaps PE still expensive
Source: Bloomberg, Sanctum Wealth
Overall, we remain underweight on equities. While market valuations are reasonable, they are not yet attractive. Earnings growth remains vulnerable to further cuts, sentiment—as reflected in fund flows—is negative, and global uncertainty remains high. We will look to reduce our underweight position as market sentiment improves or global uncertainty eases. We might miss some of the rally if there is a sudden recovery but when weighed against the possibility of avoiding downside, the latter is a clear preference. On a relative basis, we prefer large caps where valuations are below their 10-year average over both mid-and smallcaps that are trading at about 20% premium (1-year forward) to 10-year averages despite the sharp recent correction.
Fixed Income Outlook
Liquidity constraints remain a key concern for fixed-income investors. Recent RBI open market operations are improving the demand-supply balance for government bonds. Further FPI flows into debt have remained steady. However, given the shallow rate-cut cycle, we do not expect significant gains from adding duration and recommend aligning investment horizons with duration. To benefit from hybrid mutual fund taxation without increasing equity market risk, some fund houses have introduced funds investing in arbitrage and debt, offering a viable alternative to debt mutual funds for investors in higher tax brackets.
Gold Outlook
Gold has been one of the top-performing asset classes both year to date and throughout 2024, driven by concerns over US inflation and strong central bank purchases. Following the recent sharp rally, technical indicators suggest a potential pullback. However, we remain positive on the long-term outlook, as global central banks are expected to continue diversifying away from US Treasuries. Additionally, a new pilot program allowing select Chinese insurers to allocate up to 1% of their assets to gold could further boost institutional demand. Equity market volatility amid trade-related uncertainty, along with gold’s role as an inflation hedge against sticky US inflation, further reinforces its appeal.
Gold has rallied sharply over last 2 years
Source: Bloomberg, Sanctum Wealth
Sanctum Multi-Asset Portfolios
We manage our multi-asset portfolios under the SMAP framework, which reflect our tactical asset allocation decisions across three profiles: Shield (conservative), Enhancement (balanced), and Generation (aggressive).
We moved to an underweight equities stance in August 2024 amid elevated valuations and earnings misses following Q1 FY2025 results. While this led to some underperformance in August and September, it proved beneficial during the recent market correction.
We began adding private banks in July 2024 and increased our allocation in November 2024, recognizing their relative undervaluation compared to the broader market. This positioning has also performed well during the downturn. Additionally, we have been underweight midcaps since May 2024, given the wide valuation gap between mid/small caps and large caps. While this initially weighed on performance, it has proven beneficial over the past five months of market correction.
Furthermore, our overweight position in gold, driven by global uncertainty and concerns over US inflation, has played out well too. As highlighted earlier gold has been one of the top performing asset classes over the last many months and we have overweight almost through out this time.
Currently, we remain approximately 7.5% underweight in equities in our most aggressive profile, Sanctum Generation, and will look to reduce this underweight as we see signs of bottom formation. Most of this underweight is in mid and smallcaps. We maintain our overweight allocations in private banks and gold.
As a result of these tactical decisions, our portfolios have outperformed over the past five months.
Here is an update on the performance of our three multi-asset portfolio strategies:
Performance is calculated using Time Weighted Returns, net of fees and expenses. Returns over one year are compounded annually; returns for less than one year are absolute. Please note that SEBI does not verify the performance information provided above. Please note that past performance is not a guarantee of future performance.
The composite benchmarks are secondary benchmarks created for reference. The primary benchmarks for all strategies is NSE Multi Asset Index
2. NSE Multi Asset Index 2 composition is 50% Nifty 500, 20% Nifty 50 Arbitrage, 20% Nifty Medium Duration Debt Index, 10% Nifty REITs and InVITs
