Dec 2, 2024
• US election uncertainty out of the way, focus back on policies
• US Fed delivers another rate cut, pace of future rate cuts could be slower
• Some recovery in the India output data after a weak Septembers
• Weaker than expected corporate earnings, expected to stabilize in the next 2-3 quarters
Global macro updates
The US election results turned out to be surprisingly one sided, with former President Donald Trump winning both the House and the Senate. Trump’s strengthened position may allow him to press forward with the agenda outlined during his campaign. However, he will have to navigate a more complex economic environment than during his previous term. There are rising expectations in the markets for renewed policies that mirror those from Trump’s first term, including initiatives such as reshoring manufacturing jobs (bringing operations back to the U.S.) and friend-shoring (partnering with allied countries for supply chains), extension of tax cuts introduced during his previous term, and increasing fiscal spending. However, a “tighter ropewalk”- the balancing efforts to stimulate the economy and controlling inflation- will be critical as markets and voters react to his proposed policies.
US GDP growth slightly missed market expectations in the third quarter of 2024 (2.8% vs. 3% est.). Growth was mainly led by consumer spending on both goods and services. The US Fed cut rates by a further 25bps while reiterating that further changes in rate will continue to be data dependent. Chair Powell emphasized that the Fed will not alter policy pre-emptively based on assumptions or speculation about Trump policies. Instead, they will wait for these policy changes to reflect in the data before determining the future course of action.
US GDP Growth Trend
Source: Bloomberg, Sanctum Wealth
China announced its plan to introduce measures aimed at boosting its sagging economy. Expectations were (misplaced, in our opinion) were centred on measures to stimulate consumption. However, the detailed plan focuses primarily on continued debt cleanup.
Equity markets
The S&P 500 Index exhibited volatility, driven by the release of third-quarter earnings reports, with the index fluctuating between gains and losses. By mid-November, the S&P 500 had appreciated by approximately 5% since the beginning of October, reflecting underlying strength as the quarter progressed. The NASDAQ also rallied impressively, gaining 8% over the same period.
Aggregate corporate earnings for S&P 500 companies in Q3 2024 exceeded analysts’ initial expectations. As of mid-November, reported earnings had shown a year-over-year increase of around 8%, with around 70% of companies surpassing earnings expectations. This favourable performance underscores resilience despite headwinds such as persistent inflation and an uncertain geopolitical environment.
Most major global indices continued to rally following the US election results, except for China. Disappointing stimulus plan and expectations of increased tariffs by the US hurt sentiment.
Source: Bloomberg, Sanctum Wealth
India macro update
India’s GDP growth has been a focal point during this period, with the Reserve Bank of India (RBI) projecting a robust growth rate of approximately 6.5% for FY2024. Preliminary estimates for Q2 FY2024 indicate an annual growth rate of 6.8%, driven by strong performances in the agricultural and services sectors. The manufacturing sector also demonstrated resilience, supported by favourable government policies and increased foreign investments. The RBI Governor highlighted that risks to economic growth could arise from geopolitical conflicts and uncertainty surrounding the trade policies of major economies.
India’s output growth recovered after hitting a 10-month low in September for manufacturing and an 8- month low for services. Reduced government spending has been reflecting in the numbers, and the economy could face headwinds over the next 2–3 quarters.
Inflation has remained a critical concern. As of mid-November 2024, the CPI inflation rate stood at 6.1%, slightly above the RBI’s comfort zone of 2–6% and analysts’ expectations of around 5.8%. Key drivers included rising food prices due to erratic monsoon patterns, with vegetable prices surging by roughly 15% compared to the previous month. The RBI faces the ongoing challenge of managing inflation while sustaining economic growth.
India’s CPI inflation picked up led by food inflation
Source: Bloomberg, Sanctum Wealth
India equities
After reaching highs in late September, the Nifty has since corrected by nearly 10%, with only 9 out of 34 trading sessions delivering gains over the previous close as earnings disappointed. During the initial sell- off, midcaps relatively outperformed but experienced a sharp correction in the second week of November.
Indian Equities over last few weeks
Source: Bloomberg, Sanctum Wealth
Corporate earnings for Q2 FY25 are coming in weaker than expected. Excluding commodities, earnings are in line with expectations. This marks the second consecutive quarter in which the Nifty has reported single- digit growth, with PAT increasing by 4% year-over-year. There have been more downgrades than upgrades in FY25 growth estimates. Rural consumption continues to show some improvement. However, the stress in personal loans and microfinance, highlighted by the RBI a few months ago, has now impacted the earnings of lenders. That said, expectations for the segment were already significantly lowered, so the reported numbers are in line with projections.
Indian corporate earnings muted so far
Source: Motilal Oswal
The market regulator SEBI has frequently expressed concerns about the scale of speculative activity in the retail segment. Consequently, it tightened certain norms, leading to a 12% decline in the average daily turnover on the NSE.
Flows from domestic institutional investors (DIIs) remain robust, even as heavy FII selling persisted since the beginning of October. However, DII demand scaled down in the last week of October as markets continued their decline.
After being one of the best-performing markets, the swift correction has placed Indian equities near the bottom among key global markets.
Source: Bloomberg, Sanctum Wealth
Conclusion:
Segments of the market had turned quite expensive, making the recent correction a welcome opportunity to enter at more reasonable valuations. As the earnings season progresses, volatility is expected to continue. We had underweighted equities before the correction, which has helped us navigate this volatile period. We will look for opportunities to add to large-cap stocks.
We believe midcap stocks have further room to correct, as valuations remain expensive (23x FY26e) and earnings expectations are being recalibrated. Unless the segment corrects sharply, we will continue to observe from the sidelines, except in cases where we allocate to third-party managers, who are expected to deploy funds tactically based on emerging opportunities.
We have long been advocates of global investing. However, as Indian equities rallied sharply and rupee- denominated investments in global funds became more challenging, many investors have significantly underweighted global equities. We believe such imbalances should be periodically addressed. Global exposures provide a cushion for portfolios during periods like these, when domestic markets experience turbulence.
Gold has been a significant contributor to our portfolios. We overweighted gold in March, and it has delivered a 19–20% gain. If we account for the 6% price correction due to the customs duty cut, returns would have been in the vicinity of 25%. After such a sharp rally, we expect gold to consolidate and take a breather. Although we considered booking some profits, high transaction costs and escalating geopolitical risks make very short-term tactical moves potentially unrewarding. Investors should therefore consider holding on to their positions.
Silver could outperform gold over the next year or so. However, it tends to be far more volatile, and staying power will be a key determinant of returns.