Jul 16, 2025
• Global equity markets resilience masks a backdrop of heightened volatility and uncertainty.
• In the U.S., economic activity is slowing but has not yet collapsed.
• India’s macro indicators remain mixed, with a pickup in demand crucial for sustained growth.
• Valuations of Indian equities remain elevated, constraining future returns.
• In our deep dive, we discuss Indian smart beta funds and explain why we maintain a preference for multi-factor strategies like Nifty Alpha Low Vol 30.
Illusion of Calm
Global equities posted solid gains in Q2 2025, with the MSCI All Country World Index (ACWI) up 11% for the quarter. However, these headline returns mask one of the most volatile quarters in recent memory. The period opened with the “Liberation Day” tariff shock, triggering the steepest market decline since 2020, followed by a brief but intense India-Pakistan flare-up in May, and culminated in the first direct conflict between Iran and Israel in June. Meanwhile, ongoing wars involving Israel-Hamas and Russia-Ukraine continued dampen on global sentiment. Despite this turbulent backdrop, markets staged a strong rebound after significant early-quarter losses, but the sharp recovery belies persistent volatility and unresolved geopolitical and trade tensions as we move into the second half of 2025.
Global Macro Update
The U.S. government extended the 90-day pause on broad-based tariffs from 09 July to 01 August 2025. President Trump warned Canada, Indonesia, Cambodia, Thailand, and Myanmar that he will impose steep tariffs if they do not make progress on trade deals. While the administration hopes to secure agreements, tariff-related uncertainty will likely continue.
Meanwhile, U.S. high-frequency indicators point to a broad-based slowdown emerging across the economy. The Coincident Economic Index (CEI), which tracks current conditions, shows that economic activity remains positive but is steadily losing momentum. Retail sales dropped 0.9% in May, while industrial production slipped 0.3%. Manufacturing activity remains weak, with the PMI at 49 in June and new orders declining for five consecutive months. Initial jobless claims have risen, and job gains have slowed. Home sales in May fell to their lowest level in 16 years. The Conference Board’s Leading Economic Index (LEI) fell by 0.1% in May 2025 and has declined 2.7% over the past six months, signalling a heightened risk of slowdown. Overall, economic activity is clearly slowing and is expected to lose further momentum in the coming months, though it has not yet collapsed.
US economic activity expected to lose further momentum
Source: Bloomberg, Sanctum Wealth
President Trump signed the “One Big, Beautiful Bill” on 04 July, introducing $4.5tn in tax cuts over the next decade by making the 2017 tax reductions permanent, restoring full expensing for business investments and research, and adding new deductions for overtime, tip income, and a baby bonus. It also boosts funding for border security and defence. To partially offset the cost, the bill implements approximately $1.7tn in savings through cuts to Medicaid, renewable energy subsidies, and food assistance. As much of the tax relief is an extension of existing provisions, the economic boost from the bill remains debatable. However, the legislation is projected to add about $3tn, 10% of current U.S. GDP, to the U.S. deficit over the next decade, intensifying concerns about the sustainability of government debt.
Another key campaign promise of President Trump was deregulation. In this regard the U.S. Fed unveiled a proposal ease bank capital requirement. Large U.S. banks currently hold more than $200 billion in excess capital. With these rules likely to be relaxed, banks are expected to ramp up lending, accelerate share buybacks, and drive further sector consolidation.
In Europe, NATO members have agreed to more than double defence spending to 5% of GDP by 2035 after sustained U.S. pressure. Simultaneously, the EU faces an urgent need to close its innovation gap with the U.S. and China, especially in AI, where European firms attract just 6% of global venture capital compared to 61% for U.S. companies. European capital markets also remain shallow, prompting local pension funds to invest abroad for better returns and liquidity. With concerns about U.S. dominance and continued caution toward China, Europe now has a unique opportunity to attract global investors. Delivering on defence, innovation, and capital market reforms will be critical to strengthening Europe’s long-term investment appeal.
Global Market Outlook
The resilience of global equity markets despite ongoing trade tensions and geopolitical risks has left many investors baffled. One possible explanation could be that markets are focusing more on the short term than the long term. As BlackRock noted in their 2025 mid-year outlook, they now see more clarity in the near- term economic outlook than in the medium or long term. Since U.S. economic activity has not collapsed, European equities have already seen some gains, and China’s economy has yet to pick up, BlackRock remains positive on the U.S. markets.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in USD terms
Analysts remain positive on US equities so far, viewing AI as a key driver of corporate earnings and a justification for relatively high valuations compared to other developed markets. However, consensus earnings estimate for most leading US tech companies, except for Alphabet and Microsoft, have been revised downward since the start of 2025, reflecting greater caution about future growth. As a result, attention is turning to the upcoming US corporate earnings season, especially as many companies have withdrawn or withheld full-year 2025 guidance amid ongoing uncertainty. While the near-term rally may continue amid lack of options, we see headwinds emerging for US equities over medium term. Hence, we suggest those with large U.S. allocations can use any rally as an opportunity to diversify into global markets.
The Iran-Israel conflict in June triggered sharp volatility in global energy markets, with oil prices spiking during peak tensions before stabilizing after a ceasefire. Despite threats from Iran, the Strait of Hormuz, which handles about 20% of global oil supply, remained open. The ceasefire is holding for now. In addition, OPEC+ has increased supply and maintains enough spare capacity to help prevent any sustained surge in prices.
India Macro Update
Indian macro indicators remain mixed in Q2 2025. Services activity is robust, with the Services PMI rising to a 10-month high of 60.4 in June, while manufacturing lags, as reflected by a modest 1.2% year-on-year growth in the IIP for May. GST collections grew 6.2% year-on-year in June, signalling steady consumption. In the auto sector, passenger vehicle sales declined in June, while two-wheeler sales recorded growth, led by a 10% increase at Hero MotoCorp. Overall, economic activity is resilient compared to global peers, despite being below long-term trend. Rural demand is showing improvement, whereas urban demand remains subdued, and sectoral momentum varies across the economy.
The government’s recent personal income tax cuts are expected to boost household savings by nearly ₹1 lakh crore, while the RBI has injected significant liquidity and front-loaded rate cuts totalling 1% this year. Corporate balance sheets remain healthy, with strong cash flows, margins, and low leverage, though capex growth has been moderate due to subdued consumption. As fiscal and monetary easing supports demand, private capex could pick up, aiding a more durable economic recovery. However, since households are already leveraged, much of the initial tax savings may go toward debt repayment before translating into higher consumption, suggesting that a sustained recovery could take a few more months to materialize.
India Market Update
Indian equities posted a fourth successive month of gain and are less than 3% away from all time high as we write this. All major sectoral indices ended higher. Midcaps outperformed both large and smallcaps in June. Year to date smallcaps are now in positive territory.
Source: Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
Bond markets reacted negatively to the RBI’s swift shift in policy stance during the June monetary policy meeting. Despite a larger-than-expected 50 bps rate cut and the central bank’s commitment to maintaining surplus liquidity, long-term bond yields moved higher. The RBI governor later clarified that further rate cuts could be considered if inflation continues to decline, but markets remained unconvinced. As a result, 10- year bond yields have risen by nearly 10bps and now trade in the 6.25% to 6.35% range. At the same time, foreign portfolio investors were net sellers in the last quarter, pulling out over $2 bn from Indian bond markets as global investors grew more cautious about emerging market assets amid concerns over U.S. fiscal policy and inflation.
Equity Outlook
As highlighted in our previous note, margin expansion was the primary driver of profit growth in FY24. However, with margins now at elevated levels and revenue growth subdued, FY25 saw muted earnings growth. Given the limited potential for further margin gains, future profit growth is likely to align more closely with revenue growth. This makes a recovery in demand, and the resulting improvement in revenues, crucial for driving earnings in FY26. Notably, consensus earnings growth expectations for FY26 have moderated from over 20% at the start of FY25 to around 10 to 12% currently, a level we view as more realistic.
Market flows continue to support Indian equities. Domestic flows have remained strong throughout the year, even during the sharp correction in Q1, with DIIs acting as net buyers every month. SIP inflows reached a record high of approximately ₹26,700 crore in May 2025. On the foreign front, investors turned net buyers in Q2, bringing in nearly ₹42,600 crore after pulling out close to ₹1.16 lakh crore in Q1.
However, valuations remain the biggest constraint. Following the Q2 rally, Indian equities are now trading at nearly 21.2 times forward earnings, compared to the 10-year average of 18.3 times. Mid and small caps are at significant premiums to their historical averages, and most sectors are also trading above their long- term averages. Historically, elevated entry valuations have been associated with weaker long-term returns, though in the near term, strong flows could continue to propel markets higher.
Indian equity valuations have risen post recent rally
Source: Bloomberg, Sanctum Wealth
Thus, unlike BlackRock, we are more confident in the long-term outlook for Indian equities, which appears significantly more muted than in the past five years, while we remain more uncertain about the near term. As a result, in our asset-allocated discretionary portfolios, we are gradually shifting toward a neutral equity weight while maintaining an overweight position in large caps. Additionally, we plan to take tactical sectoral positions to help enhance returns in what may otherwise be a subdued environment.
Fixed Income Outlook
While the RBI’s change in policy stance signals a likely pause in rate cuts for the rest of the year, some market participants still expect the central bank could lower rates by another 25 to 50 bps if growth disappoints and inflation remains subdued. However, we believe most of the gains from holding longer- duration bonds have already materialized. As a result, we recommend reducing duration exposure and relocating to corporate bonds, which currently offer attractive spreads. The credit environment remains favourable for high-quality borrowers, supported by low corporate leverage.
We remain cautious about the higher-yield segment, as substantial inflows into private credit may have led to a loosening of covenants, increasing potential risks for investors. Consequently, we are extremely selective in this space. As discussed previously, tax-efficient vehicles such as income-plus-arbitrage funds and the upcoming specialised investment funds (SIFs) may offer opportunities for higher post-tax returns without materially increasing risk.
Gold Outlook
Gold lost a bit of momentum last quarter but remains the year’s top‑performing asset class, with returns of more than 25% year to date. Over the past three months, while geopolitical tensions in the Middle East, a weaker US dollar, and sustained central‑bank purchases supported prices, retail demand softened as global stocks rebounded.
Central banks have been the largest gold buyers
Source: Bloomberg, Sanctum Wealth
While gold continues to serve as a hedge against global uncertainty, we believe its biggest long‑term driver will be central‑bank purchases, especially in emerging markets, as they diversify away from the US dollar. Alternatives are limited: the euro has structural challenges, the Chinese yuan is still viewed with caution, and most other currencies are too small to absorb large-scale reserve allocations. As a result, gold should continue to attract inflows. We therefore remain positive on gold over long-term; however, the pace of gains may be more measured than in the past three years.
While gold hit a new alltime high in inflationadjusted terms in 2024 and is firmly in a bull market, silver has yet to reclaim its 2011 inflationadjusted peak and remains well below that level. Historically, silver and gold move together, but silver is far more volatile and, despite its industrial uses, cannot serve as a reserve asset. For these reasons, we recently added silver in our model portfolio only as a small, tactical position.
Inflation adjusted silver price still behind peaks
Source: Bloomberg, Sanctum Wealth
Deep Dive- Smart Beta Funds
India’s factor-based funds have gained popularity in recent years, as investors seek more systematic and cost-effective ways to diversify portfolios and enhance returns. Unlike traditional active funds that depend on a fund manager’s judgment, factor-based funds use clear rules to pick stocks based on traits like value, momentum, quality, or low volatility. These characteristics have historically influenced stock performance, for example, undervaluation (value), strong price trends (momentum/alpha), robust fundamentals (quality), or price stability (low volatility).
Historically, in bear markets low volatility and quality factors have done well, while in bull markets momentum, alpha and value tend to outperform. In recovery markets, months following a deep correction, value factor tends to lead.
Source: Bandhan AMC
During the recent market correction from September 2024 to February 2025, momentum and alpha factors experienced sharper declines as expected. However, Low Volatility and Quality factors did not offer their typical downside protection, with the Nifty Low Volatility 30 index falling almost in line with the Nifty 100 and the Nifty 100 Quality 30 index underperforming even more. This was largely due to weak performance in defensive sectors like FMCG, healthcare, IT, and automobile OEMs, while banks, typically more cyclical, outperformed and supported the broader market.
Source: Bloomberg, Sanctum Wealth
Given the cyclical nature of single-factor strategies, we prefer a multi-factor approach such as the Nifty Alpha Low Vol 30 index, which balances Alpha and Low Volatility factors for smoother long-term results. However, during this correction, both Alpha and Low Volatility underperformed, leading the Nifty Alpha Low Vol 30 index to lag sharply behind the Nifty 100. The index’s overweight to defensive sectors like FMCG and healthcare, along with an underweight to financials, further hurt performance. Additionally, the December 2024 rebalance increased exposure to IT just as the sector’s performance reversed, compounding the underperformance.
Factor funds follow a rules-based approach and are fully data driven, without any inherent sector bias. For example, in the June 2025 rebalance, the Nifty Alpha Low Volatility 30 index sharply increased its allocation to financials, reflecting current data even though financials are not typically considered low volatility stocks.
It is important to remember that factor performance tends to be cyclical. While the low volatility factor usually helps limit downside during periods of market stress, the current environment has not been favourable for this strategy. As a result, both Alpha and Low Volatility factors have underperformed, leading to weaker returns for the Nifty Alpha Low Vol 30 index. Notably, this index also lagged in 2022 but rebounded strongly in 2023 and the early part of 2024. Over rolling three-year periods, the Nifty Alpha Low Vol 30 has outperformed the Nifty 100 nearly 75% of the time, with an average annual outperformance of about 4.5%.
Source: NSE indices, Sanctum Wealth
Data from 01 April 2005 to 30 June 2025
We added the Nifty Alpha Low Vol 30 Index to our recommendation list in March 2022. Since then, the index has delivered a return of 15.9%, outperforming the Nifty 100, which returned 13.5%, despite a recent stretch where the Nifty Alpha Low Vol 30 Index lagged the broader market.
We believe a multi-factor approach like Nifty Alpha Low Vol 30 can help investors achieve better results than relying on single-factor strategies, which tend to be more cyclical and may require market timing. That said, multi-factor strategies can also go through phases of underperformance, reinforcing the importance of a longer investment horizon.
