Jun 13, 2025
• U.S. trade policy has softened, but concrete deal progress is minimal.
• Economic strength may weaken as front-loaded trade activity unwinds.
• U.S. fiscal deficit concerns grow, intensified by the new tax bill.
• Indian corporate earnings likely bottomed, poised for recovery with stronger economic activity.
• Indian equities outlook cautiously optimistic, driven by earnings rebound, consistent inflows, and momentum, though high valuations warrant caution.
Uncertainty Persists
U.S. tariff policy remains a significant concern for global markets. While rhetoric has softened and tariffs are paused, progress on trade deals is minimal. Legal challenges are mounting, with a court ruling curbing use of emergency powers to levy widespread tariffs. So far, front-loaded trade has kept economic data stable, but persistent uncertainty undermines business confidence and long-term planning. Markets show mixed signals, rising yields, volatile currencies, and higher gold prices signal caution, while equities stay buoyant nearing record highs.
Amid ongoing global uncertainty, the Sanctum Investment Committee turned to our proprietary asset pair model to navigate uncertainty and guide tactical asset allocation. The model indicates a cautiously optimistic outlook on domestic equities, favouring large caps and overweight gold. Hence in our model portfolios we are gradually reducing our equity underweight, while maintaining our overweight on gold.
Global Macro Update
Since the surprise sweeping tariff announcement on “Liberation Day”, rhetoric has eased. However, progress on trade deals is minimal. A baseline 10% tariff on U.S. imports will likely persist, even with new trade agreements. Elevated tariffs on Chinese goods and sector-specific tariffs will also likely persist. Meanwhile, President Trump will likely continue making bold threats, like 50% tariffs on Europe, before retracting them.
Under this scenario, the average U.S. tariff rate is projected to increase from 2.5% to 16.4%, the highest since 1937, reshaping global trade. The impact is evident: cargo volumes at Long Beach and Los Angeles ports dropped 35–40% and 31%, respectively, in May 2025.
Yet, the effects of tariffs have not fully reflected in macroeconomic data amid front-loading of trade activity. Preliminary Q2 estimates show global GDP holding up relatively well. Henceforth, growth may weaken as pre-emptive trade fades, tariffs raise U.S. consumer prices, and businesses cut investment and hiring amid ongoing uncertainty.
Meanwhile, the latest Fed minutes reveal growing concern over persistent inflation, which remains above target despite some moderation. The headline PCE price index moderated to 2.1% year-over-year—below the 2.2% forecast—and core PCE inflation eased to 2.5% in April 2025. The Fed warned that new tariffs could add to price pressures, complicating efforts to restore stability. The Fed remains cautious, aiming to curb inflation without further straining a labour market which is already showing signs of weakness.
Another market concern is the rising U.S. fiscal deficit. The Congressional Budget Office projects a $1.9 trillion deficit for fiscal 2025 (6.2% of GDP), the highest outside wartime or recession. The “Big Beautiful Bill” passed by the house in May 2025 could add $3.3–$3.8 trillion to federal debt, potentially rising to $5 trillion if temporary measures become permanent. Public debt is forecasted to rise from 100% of GDP in 2025 to 118% by 2035, surpassing 1946’s 106% peak. Yale’s Budget Lab estimates $2 trillion in tariff revenue over ten years, ignoring trade slowdowns. Thus, tariffs won’t offset the growing deficit.
US debt to GDP to reach 118% by 2035
Source: Bloomberg, Sanctum Wealth
Global growth prospects have also weakened. However, Europe and China can pursue monetary easing and fiscal support. Germany has announced significant increases in infrastructure and defence spending, while China is rolling out stimulus measures. The Bank of Japan also maintained a dovish stance, keeping rates unchanged and lowering its inflation forecast, citing weaker growth outlook.
Global Market Outlook
As trade rhetoric eased, the S&P 500 gained 6.2% in May and is now less than 3% below its all-time high. Markets globally have recovered from the post-Liberation Day losses and are approaching record levels. European stocks, represented by the MSCI Europe Index, are up nearly 20% so far this year in US dollar terms, significantly outperforming the U.S. market.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in USD terms
Earnings forecasts have been lowered in most markets. However, U.S. firms face heightened pressure from tariffs and limited Fed support, unlike other central banks. U.S. equities also remain expensive relative to global peers. As a result, we continue to recommend global diversification. The recent U.S. market rally may offer a good opportunity to book profits for those with heavy U.S. equity exposure.
As noted earlier, U.S. bond markets reflect rising concerns. The 10-year U.S. Treasury yield rose 50bps from recent lows to over 4.5%, reflecting investor concerns about the fiscal outlook which is worsened by the new tax bill. Interest payments on U.S. Treasuries are now the second-largest driver of the federal deficit. Further, U.S. Treasury refinancing needs in 2025 will more than double 2024’s. While yields are attractive at an absolute level, long-duration U.S. bonds may remain volatile.
US government debt maturing in value ($ trillion)
Source: Bloomberg, Sanctum Wealth
Similarly, concerns over US debt will likely constrain any dollar recovery following this year’s sharp decline.
India Macro Update
India’s Q4 FY25 GDP rose 7.4% YoY, with full-year FY25 growth at 6.5%, down from 9.2% in FY24. The Q4 figure surpassed the RBI’s 7.2% YoY forecast, supported by rebounding government spending and resilient rural demand, offsetting weak urban consumption. Since the model code of conduct related constraints were lifted, public capex picked up sharply in H2FY25.
However, high-frequency indicators reveal a mixed picture. Bank credit growth fell to 9.8% YoY in May 2025 from 19.5% a year earlier, while the Index of Industrial Production (IIP) dropped from 5% YoY to 2.7% in April. Capital goods output and core sector growth also weakened. In contrast, services strengthened, with the Services PMI up from 56.5 in January to 61.2 in May 2025.
Looking ahead, urban demand should recover, driven by monetary easing, targeted tax cuts, and stable inflation. Rural demand should remain steady, supported by an above-average monsoon forecast—though spatial distribution remains key. With a pick-up in government spending, capital goods output should rise. Private investment may revive if demand strengthens, given strong corporate balance sheets. However, global trade disruptions and rising U.S. tariffs threaten growth outlook.
Heading into the latest monetary policy meeting markets were pricing in three to four further 25bps rate cuts by the RBI in the current rate cutting cycle. However, the RBI surprised markets by front-loading rate cuts with a larger-than-expected 50bps rate cut and a 1% CRR reduction. It also unexpectedly shifted its stance from accommodative to neutral, signalling a more cautious outlook. Markets now anticipate a pause, with the RBI expected to remain data dependent. The central bank maintained its FY26 growth forecast at 6.5% and revised inflation down to 3.7%, though it noted inflation may rise gradually in the second half of FY26 while staying within the target range. Overall, the RBI appears to have struck a prudent balance providing near-term support to growth while preserving policy space to respond if global conditions deteriorate due to tariff actions.
Indian Market Update
Indian equities posted a third straight month of gains as Q4FY25 earnings held steady and global markets rallied. Mid- and small-cap stocks outperformed large caps in May, with midcaps turning positive for the year, while small caps still have some ground to recover. PSU banks, IT, auto, and the PSE index were among the top performers last month.
Source: Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
After the RBI’s monetary policy announcement on 06 June, bond yields reacted differently across maturities. Yields on shorter-term bonds (less than 2 years) fell by 10–20 basis points. In contrast, yields on long-term bonds edged up slightly. The decline in short-term yields was driven by the liquidity boost from the CRR cut. However, long-term yields rose as the RBI signalled a likely pause in the rate cut cycle, catching the market by surprise.
Source: Bloomberg, Sanctum Wealth
Change in yield across the yield curve post RBI policy meeting
Tactical Asset Allocation | Quarterly Asset Pairs Review
Equities vs Bonds
Valuations expensive, macro and earnings likely to improve in coming quarters.
Between FY21 and FY24, profit growth outpaced revenue growth as margins expanded. In FY25, earnings normalized and caught up with revenue growth. As earnings weakened in Q2 and Q3, Q4FY25 expectations were muted. However, Q4 results were slightly better, with Nifty PAT up 3% YoY versus a 2% estimate. Excluding financials and commodities, Nifty firms saw 9% YoY revenue and 10% EBITDA growth. For the year, Nifty EPS rose 6.4%. More companies beat analyst estimates this quarter, a reversal from earlier trends. Most sectors, except some private banks, delivered strong results. In consumer, performance was mixed, but demand stayed strong in alcoholic beverages, hotels, and select fashion retail.
However, Nifty EPS estimates for FY26 were revised down by a further 1.9% this quarter. We believe these revised estimates are more realistic at around 12-13% growth for FY26 and expect earnings to improve in the upcoming quarters as economic activity picks up.
Profits growth normalised
More beats than misses in Q4FY25
Source: Bloomberg, Sanctum Wealth
No of companies with better, in-line or lower earnings that Bloomberg estimates
The broader large-cap universe posted earnings growth of around 10%, while midcaps delivered a stronger 19% growth. In contrast, small-cap earnings declined by 16% YoY, with a larger number of companies missing analyst estimates.
Equity valuations had moderated after the recent correction. However, with a rally of over 13% from the recent lows, valuations have risen across key indicators such as P/E, P/B, P/S, and market cap-to-GDP. Nifty’s 12-month forward P/E now stands nearly one standard deviation above its long-term average. Even compared to the MSCI Emerging Markets index, India is trading above historical averages. One source of comfort is the moderation in bond yields, which could help equities continue to attract investor flows.
The most notable shift in our asset pair model is in flows. In February 2025, market sentiment was weak, and foreign investors were exiting aggressively. Since then, FPI flows have turned positive, with USD 2.3 billion in inflows in May 2025. FPI ownership in Indian equities is near a decade low, suggesting room for further inflows as sentiment toward EMs improves. Meanwhile, domestic flows have remained resilient, even during recent market corrections.
With signs of economic recovery, a bottoming out of earnings, resilient domestic flows, a reversal in FPI flows, and strong technical momentum, the outlook for equities has improved. We reduced our underweight position during the recent correction but couldn’t fully increase exposure due to the sharp rally. Given the rise in valuations and ongoing global uncertainty, we plan to gradually raise equity exposure toward neutral levels and accelerate deployment on any market dip.
Within equities, we continue to prefer large caps given better valuation comfort. Mid and small caps continue to be significantly more expensive to their historical averages. Further, both mid and small caps saw greater cut in earnings expectations for FY26 and FY27. That said, not all mid and small caps are overvalued, many are reasonably priced and delivering solid performance. Rather than broad exposure, we prefer letting active managers selectively pick names in this space.
Fixed Income
Accrual over Duration
Markets were surprised when the RBI unexpectedly changed its policy stance to “neutral,” which means it may pause rate cuts for now. Before the rate cut, the 10-year bond yield was just 20 basis points above the repo rate, much lower than the usual gap of around 100 basis points, showing that the market had priced in more rate cuts. Even if one or two more rate cuts happen later, most of the gains from long-term bonds are likely behind us. So, we believe it’s a good time to book profits in long-duration bonds.
After several years of low credit spreads (difference between government and corporate bond yields), the recent decline in government bond yield has brought credit spreads back to normal levels. The overall credit environment also looks healthy, with companies carrying low debt and more of them getting credit rating upgrades than downgrades. Hence, we prefer high-quality corporate bonds over government bonds.
Credit spreads have improved
upgrade continue to outpace downgrades
Source: Bloomberg, Sanctum Wealth
In the past few months, high liquidity has caused short-term interest rates to fall more than long-term rates. The recent CRR cut added to this trend. As a result, the gap between short- and long-term bond yields has widened to about 75 basis points. Short-term funds may now have to reinvest at lower yields. Hence, for those with a longer investment horizon, we suggest moving some money from money market funds to corporate bond funds which offer better yield. Income plus arbitrage funds, which allocate a portion of the portfolio to equity arbitrage funds and the remainder to debt funds, can also be considered for tax-efficient investing, as gains are taxed at 12.5% if held for more than two years.
USD vs INR
Dollar weakness likely to continue
The US dollar (DXY) has fallen sharply in recent weeks due to growing concerns about the US fiscal deficit and investors moving away from US assets. Meanwhile, the RBI has used this time to build up India’s foreign exchange reserves. Compared to other currencies, the Indian rupee (INR) looks fairly valued, with the real effective exchange rate below 100. Low crude oil prices also support the rupee, and foreign investors have returned to Indian equities. Overall, we expect the INR to be resilient relative to the US dollar.
Gold vs Cash
Fundamentals remain supportive
Gold prices have rallied sharply, making gold appear expensive relative to other commodities like silver. However, we believe several fundamental factors continue to support gold. As a traditional hedge against uncertainty, gold remains attractive in the current environment of elevated geopolitical and policy risk under President Trump. With concerns mounting over the U.S. fiscal deficit, many investors are turning to gold as a safe haven over U.S. assets. Demand from both ETFs and central banks has held firm. While the recent rally has been strong, it remains moderate compared to past bull runs in 1970, 1978, and 2007. That said, after the sharp move up, prices may consolidate in the near term before resuming their upward trajectory.
Historical Gold break outs
Source: Bloomberg, Sanctum Wealth, Incrementum on In Gold We Trust report 2025
Rebased gold rally from the start of the year mentioned relative to recent rally
Sanctum Multi-Asset Portfolios
We manage our multi-asset portfolios known as SMAPS, which reflect our tactical asset allocation decisions across three profiles: Shield (conservative), Enhancement (balanced), and Generation (aggressive).
We used the equity market correction in January and February to reduce our underweight position. This was funded through marginal profit booking in gold and deploying available cash. However, the sharp rally in March and April limited our ability to add further to equities. We plan to continue increasing equity exposure gradually and will accelerate deployment if the market corrects.
At the same time, we are making some tactical moves to enhance portfolio returns. Recently, we shifted a portion of our allocation from Nifty private banks to Nifty public sector enterprises, given the strong momentum in that segment. We’re also considering booking some more profits from gold and increasing our allocation to silver, as the silver-to-gold ratio is near its all-time low. We will, however, remain overweight gold despite this change.
Meanwhile, all our portfolios have outperformed during across time periods with lesser drawdowns and volatility. 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.
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
