May 13, 2025
• Recent data indicates that tariffs are beginning to weigh on U.S. economic activity.
• Global equities rebounded in late April as the escalation of reciprocal tariffs took a temporary pause.
• India’s economic indicators remain mixed, though early April data raises hope of improvement.
• Corporate earnings in India in line with muted expectations, but earnings downgrades persist.
• The recent market rally has yet to price in potential second-order effects on global growth.
• Tensions with Pakistan may keep Indian markets volatile.
Reshaping the World Order
President Trump’s first 100 days in office marked a significant shift in U.S. foreign and economic policy. His “America First” approach introduced aggressive tariffs, strained traditional alliances, and signalled a retreat from multilateral agreements. This shift away from globalization toward isolationism is reshaping global trade, investment flows, and diplomatic ties. The global economy is grappling with heightened uncertainty and a lack of clear direction. A sharp sell-off in U.S. bonds, declining approval ratings for President Trump, and softer economic data have sparked hopes of a more moderate stance, though only time will tell.
India responded to terrorist attacks in Kashmir with strikes on nine terror camps in Pakistan under Operation Sindoor. Pakistan retaliated with missile and drone attacks, which India successfully neutralized. While India’s response was anticipated, the escalation in tensions weighed on markets. While India and Pakistan have now reached a ceasefire agreement, tensions between India and Pakistan may remain heightened in the near term
Global Macro Update
Tariff announcements on the so-called “Liberation Day” caught markets off guard, triggering a sharp rise in bond yields amid deteriorating investor sentiment. In response, the U.S. likely paused reciprocal tariffs for 90 days. The U.S. also granted automakers a two-year reprieve from tariffs on imported car parts last week. Meanwhile, trade tensions between the U.S. and China have intensified, with the U.S. imposing tariffs of up to 145% on Chinese imports and China retaliating with tariffs of up to 125% on U.S. goods. The oscillation between hardline and conciliatory rhetoric will fuel uncertainty, delay corporate investment, and weigh on global economic momentum even as both sides acknowledge the risks.
US economic data weakening
Source: Bloomberg, Sanctum Wealth
Recent data underscores the mounting toll of tariff-related uncertainty on the U.S. economy. Consumer and business sentiment have declined sharply, with consumer confidence falling to its lowest level since the pandemic and business confidence hitting an 18-month low. The U.S. economy contracted 0.3% in Q1 2025, missing expectations, largely due to pre-tariff import surges and reduced government spending.
Core PCE inflation rose to 3.7%, adding complexity to the Federal Reserve’s policy path. Despite signs of economic softening, the Fed held rates steady, citing persistent inflation risks. Chair Powell reiterated the Fed’s commitment to price stability, even as concerns over central bank independence mounted following President Trump’s brief threat to dismiss him. With uncertainty stemming more from trade policy than fundamentals, the Fed is likely to remain cautious while continuing to assert its independence.
The Eurozone economy grew by 0.4% in Q1, supported by U.S. stockpiling ahead of anticipated tariffs. The tangible impact of tariffs on autos, steel, and aluminium is expected to become clearer in Q2. Germany’s new government is expected to prioritize fiscal stimulus and U.S. trade negotiations, though any economic benefits may take time to materialize. Ongoing political instability, given the government’s slim majority, may hinder decisive policymaking. In the near term, the European Central Bank (ECB) is likely to remain the main source of policy-driven growth support.
China’s economy grew by 5.4% year-on-year in Q1 2025, exceeding expectations on the back of strong exports and domestic demand. However, analysts anticipate a slowdown, projecting full-year growth of between 3.5% and 4.5%, even with significant fiscal stimulus, as escalating US tariffs weigh on the outlook. In response to rising trade tensions, China has acknowledged the need to de-escalate.
Global Market Outlook
After an initial steep decline, global equity markets staged a strong recovery in April, regaining most losses following the announcement of a 90-day trade pause. European and Japanese equities led gains among developed markets, while Indian and Brazilian markets drove performance in the emerging market segment. However, rising US-China trade tensions weighed on Chinese equities, which ended the month in negative territory.
Source: : Bloomberg, Sanctum Wealth
Above returns are price returns in local currency terms
U.S. corporate earnings in Q1 2025 were strong, with around 76% of S&P 500 companies beating expectations, well above the long-term average of 67%, driven in part by robust results in the banking sector. However, rising uncertainty over U.S. trade policy has prompted cuts of over 3% in 2025 EPS estimates, with several companies withdrawing full-year guidance. The steepest downgrades were in the Energy, Materials, Consumer Discretionary, and Industrials sectors, reflecting increased caution in corporate outlooks.
Ongoing policy uncertainty is likely to keep global equity markets volatile, increasing the relevance of relative valuation comparisons. European equities appear better positioned, with the MSCI Europe ex-UK index trading at a discount of over 35% to U.S. markets. The region’s economy is also likely to be less exposed to tariff risks than the U.S. In China, despite tariff-related challenges, several domestically focused companies continue to offer attractive valuations. Meanwhile, Japan benefits from resilient domestic demand and ongoing corporate restructuring. While reliant on U.S. exports, it offers a compelling diversification opportunity away from the U.S.
Source: : Bloomberg, Sanctum Wealth
India Macro Update
India’s economic activity in Q4 FY25 remained mixed, with high-frequency indicators showing only marginal improvement over the previous quarter. Consumer sentiment plateaued, with rural areas faring better than their urban counterparts. Consumers increasingly opted for more affordable choices across a range of categories. Business sentiment also softened during the same period. However, April 2025 brought signs of optimism. The Manufacturing PMI rose to 58.2, marking the strongest growth in ten months. GST collections also reached a record high of ₹2.37 lakh crore, signalling a broad-based recovery in economic activity.
Looking ahead, both the government and the Reserve Bank of India (RBI) have introduced measures to support domestic consumption. The RBI has eased regulations on banks and NBFCs, and injected liquidity to boost household credit. A favourable monsoon and a strong Rabi harvest should support rural incomes, while income tax cuts and renewed government spending are expected to bolster demand, though the full impact may take time to reflect in the economic data.
With the ceasefire agreement a prolonged conflict appears to have been avoided for now. A prolonged conflict could have reduced India’s GDP growth by as much as 1%. Historically, growth has rebounded following periods of conflict, as reconstruction drives economic activity although inflation and fiscal deficits typically rise. India’s strong fundamentals, including a manageable fiscal deficit, controlled inflation, stable foreign exchange reserves, limited short-term external debt, and a relatively steady rupee provide a degree of economic resilience. We believe the economy can withstand conflict-related disruptions to some extent if the tensions escalate again, as the government has sufficient fiscal space to counter a temporary growth slowdown.
Equity Outlook
Indian equities, like global markets, rebounded after the 2 April 2025 tariff-driven sell-off, but experienced renewed volatility amid rising geopolitical tensions with Pakistan. Despite this, markets ended April with solid gains, and strong performances in March and April have helped large caps recover all losses from January and February. Mid- and small-cap stocks rose in April, though they remain negative on a year-to-date basis. Foreign investors turned net buyers in April, investing approximately USD 1 billion in Indian equities after selling USD 14 billion in the previous quarter.
Source: : Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
Earnings estimates were further revised downward during the ongoing Q4 FY25 results season. While Q4 FY25 sales, EBITDA, and profit growth have so far aligned with muted expectations, FY26E Nifty EPS was reduced by a further 1% in April, with growth now projected at approximately 12%. In April 2025, earnings downgrades outpaced upgrades. Further revisions are possible, and FY26E Nifty EPS may be lowered again by the end of the results season. Thus far, IT services and Oil & Gas have accounted for the majority of the earnings downgrades.
While mid- and small-cap valuations have eased from their September 2024 peaks, they remain elevated following the March–April rally — with mid-caps trading approximately 20% above their 10-year average forward price-to-earnings ratio, and small-caps around 45% higher. Large-caps have also risen but continue to trade near historical averages.
Source: : Bloomberg, Sanctum Wealth
Markets anticipate that India will benefit from the ongoing global trade realignment, as manufacturing gradually shifts away from China. India’s reciprocal tariffs have remained relatively modest compared to those imposed by regional peers such as Bangladesh, Vietnam, Indonesia, Malaysia, and Thailand. Additionally, bilateral relations between the United States and India appear to have strengthened under President Trump and Prime Minister Modi. While this may support India’s long-term prospects, second-order effects of global tariffs are likely to impact all economies in the near term, India included. The extent of the impact will depend on factors such as bilateral trade agreements with the United States, the de-escalation of U.S.–China tensions, and greater policy clarity from Washington.
We believe India–Pakistan tensions may keep markets volatile despite recent de-escalation. Gold, a traditional hedge in uncertain times, has supported our portfolio over the past two volatile years; we are currently overweight on gold and underweight on equities. We intend to gradually shift from gold to equities as conditions evolve. Within equities, large-caps offer a more favourable risk–reward profile, given relatively attractive valuations. Some mid- and small-cap segments have corrected and now appear more reasonably valued, making selective allocation via active managers appropriate.
Fixed Income Outlook
The minutes of the latest Monetary Policy Committee (MPC) meeting had a dovish tone. The MPC noted that inflation risks have eased, supported by record wheat output and improved production of key pulses, earlier drivers of food inflation. With forecasts indicating a normal monsoon, inflation expectations remain well anchored. All members stressed the need to support growth amid global uncertainty, despite stable domestic conditions. While markets are pricing in over 75 bps of further rate cuts, we believe the RBI may take a cautious, wait-and-watch approach, similar to the U.S. Fed, to preserve policy space in case global growth weakens sharply.
Indian bond yields have declined sharply
Source: Bloomberg, Sanctum Wealth
We expect the RBI to maintain its supportive liquidity stance, as seen in recent months, and continue keeping credit regulations relaxed to encourage credit growth in India.
With bond yields having already declined across tenors, we believe the added volatility from longer duration may not be justified by potential returns. As such, we continue to recommend aligning portfolio duration with the investment time horizon to minimise reinvestment risk while avoiding unnecessary interest rate volatility.
Gold Outlook
Gold has been among the top-performing asset classes this year, rising nearly 70% over the past 30 months. The rally has been driven by strong central bank demand, a weakening U.S. dollar (with which gold typically shares an inverse relationship), and heightened geopolitical uncertainty fuelled by U.S. tariffs. U.S. gold ETF investors have also increased holdings as a hedge. However, gold prices have eased slightly in recent days as trade-related rhetoric from the White House has moderated.
Gold prices have nearly doubled in last 5 years
Source: Bloomberg, Sanctum Wealth
Several factors continue to support gold prices: growing stagflation concerns, characterised by low growth and high inflation, typically favour gold; traditional safe havens such as U.S. Treasuries are less attractive amid policy uncertainty from the U.S.; equity market volatility remains elevated; and expectations of a weaker dollar further enhance gold’s appeal.
Gold appears overbought based on technical indicators, pointing to a potential near-term pullback. It has already eased from recent highs and is currently consolidating. Despite this short-term weakness, the long-term trend remains bullish.
We believe several supportive factors for gold are already priced in, which could result in a near-term pullback. A softening in trade rhetoric or progress on trade deals may trigger a correction in gold prices. However, with global market volatility likely to remain elevated under the new U.S. administration, gold continues to serve as a valuable hedge. Any dip may offer a buying opportunity for under-allocated investors. In our model portfolio, we plan to gradually reduce our overweight in gold and reallocate towards equities.
