Sep 12, 2025
Atmanirbhar Bharat
The 50% tariffs on Indian exports to the U.S. took effect in August. In response, Indian policymakers are focusing on boosting domestic growth through tax cuts, rate cuts, GST reforms and liquidity measures, while pursuing FTAs with key partners and improving ties with China. Additionally, PM Modi’s Independence Day speech hinted at more reforms ahead. While prolonged tariffs would hurt, these steps could help offset some of the impact.
Meanwhile, the U.S. job market has slowed sharply, making a September rate cut more likely. So far, markets remain upbeat, showing little concern about a deeper economic slowdown.
Global Macro Update
Amid concerns about Fed independence, Chair Powell delivered a carefully worded speech at Jackson Hole, noting that the ongoing labour market weakness “may warrant” future rate cuts. While he avoided committing to a cut, markets quickly interpreted his remarks as signalling a likely rate cut in September 2025. Chair Powell acknowledged growth risks but also highlighted the policy dilemma of balancing tariff-driven inflation and fiscal deficit concerns with a slowing US economy. Recent weak job reports have tilted the balance toward a September cut, but we believe the Fed will remain data-dependent beyond September, and this does not necessarily mark the start of a new rate-cutting cycle.
Tariffs remain a key focus in global macro discussions. The effective US tariff rate has surged from around 2–3% to the high teens, based on most estimates. Around 60–80% of the resulting price increases are expected to be passed on to US consumers. Adding to the pressure, the USD has fallen more than 10% from its peak in January 2025 unlike in 2018 when a stronger dollar offset some of the impact of China tariffs. This double squeeze has pushed import prices higher, with the average US household paying over USD 2,000 annually in tariff-related costs. The burden will be felt most by lower-income households, whose spending is more concentrated on goods, especially amid reduced government support and transfers.
Tariffs to impact lower-income households more
Source: Budget Lab at Yale, GTAP v7, Census, BLS, BEA
The US job market has weakened sharply, with only 22,000 jobs added in August 2025 versus expectations of 75,000. The three-month average is now below 30,000, well under the 75,000–100,000 typically needed. While unemployment is at 4.3%, it understates weakness caused by falling labour participation and record deportations. Without these factors, unemployment would be much higher. Wage growth has also cooled, with nominal wage growth below 4% in August, raising concerns given inflation is averaging around 3%. Additionally, the share of full-time employment remains low, which could weigh on personal consumption.
Real wage growth in the US has cooled down sharply
Source: Bloomberg, Sanctum Wealth
Looking ahead, consumer spending, the main driver of US GDP growth, will be constrained by weak wage growth, low full-time employment, high debt servicing costs, and higher prices from tariffs. With no clear boost from business investment or exports amid tariff uncertainty, the US economy could slow sharply in the coming months.
Global Market Outlook
Global equities saw gains in August 2025. In the U.S., market interpretation of Fed comments as dovish boosted markets, led by technology stocks and broad-based strength. European equities were flat in local terms amid sluggish growth and French political uncertainty, but dollar weakness lifted returns for US dollar investors. Japanese markets outperformed both in local currency and US dollar terms, hitting new highs on steady earnings upgrades and foreign inflows. In emerging markets, China drove momentum with plans to triple chip supply by 2026, boosting tech stocks.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in USD terms
Q2 2025 U.S. earnings beat expectations, with S&P 500 EPS rising 11.7% YoY versus forecasts of 5–6%. Growth was driven by the technology sector, especially the “Mag 7,” which posted earnings growth above 20% compared to 7% for the rest of the market. However, market reactions were muted, with even strong results from companies like Nvidia met with lukewarm responses. FactSet data shows companies delivering positive surprises gained just 0.3% on average, while those missing estimates fell 5.5%, highlighting stretched valuations and elevated expectations.
Bridgewater Associates estimates that tech capex has been a major driver of U.S. GDP growth, which could have already slowed to around 1% without it. However, concerns are rising about the ROI of these AI investments. With tariffs starting to weigh on the economy, a broader slowdown is expected. This makes projected earnings growth of 11% in 2025 and 13.6% in 2026 harder to achieve. Combined with elevated valuations, downside risks for U.S. equities are building. While the tipping point is hard to predict, we continue to advise heavily U.S.-allocated investors to diversify.
Tech capex has significantly contributed to U.S. GDP growth
Source: Bridgewater Associates
Earnings revisions for Euro Area equities remain weak, with CY2025 growth now expected at just 2.2%, while political uncertainty in France adds to concerns. However, attractive valuations and policy support, such as Germany’s infrastructure and defence spending plans, could support Euro area equities for investors with longer time horizon. Japanese equities stand out among developed markets, supported by corporate reforms, share buybacks, wage growth, and strong foreign inflows, signalling a potential break from decades of stagnation.
Bond markets delivered solid returns in August on expectations of Fed rate cuts, with the U.S. 10-year yield falling nearly 30 bps. However, very long-term yields (30-year) remain under pressure due to concerns over the fiscal deficit and inflation. Similar fiscal worries are also pushing up long-dated yields in the U.K. and France. While Fed cuts may ease short-term yields, long-term yields could stay elevated amid doubts about Fed independence and U.S. fiscal stability. We don’t suggest adding too much duration globally.
The U.S. government’s move to create a strategic Bitcoin reserve and digital asset stockpile marks a step toward making cryptocurrencies more mainstream. The U.S. is now the largest sovereign Bitcoin holder, with about 210,000 coins (~1% of total supply). Since January 2024, 11 spot Bitcoin ETFs have launched, with combined AUM exceeding USD 140 billion. The stablecoin market has also surged, with market cap topping USD 250 billion. While still small compared to traditional assets and their role still uncertain in portfolios, it’s clear that digital assets are here to stay.
India Macro Update
India’s Q1FY26 real GDP grew 7.8% YoY, beating estimates of around 6.5%. However, nominal GDP rose only 8.8% YoY, much below the long-term average of 10–12%. The strong real GDP figure was largely driven by a low GDP deflator and some frontloading of exports ahead of tariffs. Therefore, instead of placing too much emphasis on the real GDP growth surprise, we’re more concerned about the weaker nominal GDP growth.
India’s nominal GDP growth in Q1FY26 well below historical averages
Source: Bloomberg, Sanctum Wealth
US-India trade talks have made little progress, with India’s exports to the US now facing a 50% tariff. Around 60% of US imports are tariffed, pushing the effective rate to ~34%. The direct impact is currently limited to sectors like textiles, gems and jewellery, household items, and seafood. However, the hit will be severe for MSMEs, which lack the financial strength to absorb the shock. These sectors are also labour-intensive, employing about 21 million workers directly and indirectly in 2023, raising the risk of job losses if tariffs persist. India now has some of the highest tariff rates in Asia, which could disrupt the China+1 shift. While pharma and services are currently exempt, potential tariffs on pharma products could be a major negative.
Our base case is that India will negotiate its way out of these tariffs in the coming months. However, if high tariffs persist, the Indian economy could face significant headwinds.
India faces amongst highest tariffs across Asia
For India the rate includes 25% penalty rate as well
Source: The White House, USITC, MAS and Nomura Global Economics
Meanwhile India is pursuing multilateral partnerships through FTAs with key countries like Japan, Singapore, South Korea, the U.K., the UAE, and Australia. It is also seeking to improve ties with China, though only limited cooperation is likely and not a grand alliance like some are hoping for. Areas of collaboration may include border stability, securing energy transition supply chains, and expanding trade in sectors like pharmaceuticals. However, given their history, the risk of returning to strained relations remains high.
While US tariffs are beyond India’s control fully, the government and RBI are taking steps to support the economy. In his Independence Day speech, PM Modi announced major GST reforms, a youth employment scheme, a new agricultural program for 100 underdeveloped districts, and technology initiatives such as semiconductor manufacturing, deep-sea oil and gas exploration, and nuclear energy expansion.
The government has simplified GST by reducing the slabs from four to three, with taxes on essential and aspirational goods set at either 5% or 18%, some sin goods moved to 40%, and certain cess removed. Selected items now have zero GST to boost consumption. The revised rates take effect from September 22, 2025, the start of the festive season. Unlike income tax cuts or subsidies, these changes benefit all households, particularly rural and lower- to middle-income groups and would support consumption.
GST rates have been cut for many goods
GST rates for 391 items which have undergone a change
Source: ICRA Research, Ministry of Finance
The council also addressed the long-standing inverted duty structure in textiles and fertilizers and simplified the input tax credit (ITC) claim process. This will speed up the release of blocked credit, a major challenge for MSMEs, enhancing ease of doing business and supporting this critical sector. Overall, the reform aims to simplify the tax system, increase disposable income, and support long-term economic growth.
The government plans to launch an ‘Export Promotion Mission’ to support exporters facing higher tariffs. The scheme may provide liquidity support, help with interest payments, and improve access to alternative trade finance.
These reforms complement other measures by the government and the RBI. The government cut personal income tax in its last budget to boost consumption, while the RBI reduced rates by 1% in 2025 and provided additional liquidity through open market operations and CRR cuts. Analysts expect further reforms, including judicial improvements, faster approvals, and simplification of land and labour laws. We believe these policy measures can offset the impact of high US tariffs on Indian exports and support the structural improvement of the Indian economy.
India Equity Outlook
Indian equities declined for the second consecutive month amid heightened volatility driven by U.S. trade tensions. Despite strong domestic institutional support, foreign outflows weighted on the markets. Export oriented sectors saw deeper correction.
Source: Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
Q1FY26 earnings were slightly better than expected, with stable margins and EPS growth matching revenue growth. Looking ahead, earnings are projected to grow at 12–13% annually over FY25–FY27. However, with most efficiency gains already realized, further margin expansion is limited, making stronger revenue growth essential to meet these targets.
Recent policy measures, including tax cuts, rate cuts, and liquidity support, are expected to revive domestic consumption and offset the drag from U.S. tariffs. This should support revenue and earnings growth. Still, if tariffs remain elevated for an extended period, achieving the projected EPS growth could become challenging.
Over the past few years, capex-heavy sectors have driven the market amid subdued consumption. Now, with policy support aimed at boosting demand and exports facing external headwinds, we expect a rotation toward consumption-driven sectors. While we were slightly early in recommending this theme, we believe the current environment presents an ideal opportunity. Valuations in the consumption space are reasonable, and the policy backdrop is increasingly favourable, setting the stage for a sustained recovery.
Small and midcap companies saw stronger margin improvements than large caps after Covid. However, the scope for further margin gains now appears limited. Despite recent earnings downgrades, consensus still expects a sharp acceleration in small and midcap profits in the coming quarters. Without margin tailwinds, achieving these high expectations will depend on a sustained recovery in consumption. With valuations already elevated, this segment of the market carries higher risk.
Small and midcaps have seen greater downgrade in EPS growth
Source: Nuvama Research, Bloomberg
Note: Large caps refer to top 100 companies in BSE 500 and rest are small and midcap stocks.
Estimates are Bloomberg consensus
The government’s announced policy measures, along with those potentially in the pipeline, are positive for India over the medium to long term. However, the recovery in demand is likely to be gradual rather than a sharp V-shaped rebound. As a result, overall equity market returns in the near-term may remain muted. Certain areas, such as consumption-focused sectors, could perform better, while active managers may still find attractive opportunities in mid and small-cap stocks, even though the segment appears expensive at a broader level.
Fixed Income Outlook
After a secular move lower for a while, India 10-year government bond yields have moved back up to the levels seen in March 2025. Lower liquidity surplus and fiscal concerns from GST-reforms have weighed on bond yields. The Rupee has also weakened a bit against the US dollar and a lot more against other currencies.
The RBI kept rates and its growth forecast unchanged at 6.5% in its August policy meeting while revising its inflation forecast lower. It maintained a neutral stance, indicating that future rate actions will depend on incoming data. We expect one more rate cut this year, and further cuts are unlikely unless growth slows sharply.
A key question now is whether bond yields have bottomed. Historically, yields tend to bottom about a year before the start of a rate hike cycle. While this will only be clear in hindsight, we believe most of the duration gains have already been realized and suggest investors book profits. In the current environment, focusing on accrual strategies through corporate bonds is more prudent.
Bond yields have bottomed much ahead of first-rate hike
Source: Bloomberg, Sanctum Wealth
Investors should also explore fixed-income alternatives such as income-plus arbitrage funds, REITs, InvITs, and upcoming specialized investment funds, depending on their suitability.
Gold and Silver Outlook
Gold and silver have been standout performers this year, rising about 35% and 40% year-to-date, respectively. Our overweight position in gold and recent addition to silver have boosted performance of our multi-asset portfolios. This rally has been driven by multiple factors coming together to support both metals.
Gold’s performance is notable because such rallies have usually happened during major global crises like the dot-com crash, the global financial crisis, or the COVID-19 pandemic. This time, the rally is being fuelled by different fundamentals.
The biggest driver has been strong central bank buying over the past three years, especially from China and Russia, as they reduce their reliance on US Treasuries. Recently uncertainty around US tariffs have further boosted gold’s appeal as a safe-haven asset. These factors have also led to strong inflows into gold ETFs globally. We believe that safe-haven demand and central bank diversification are long-term trends that will continue to support gold over the long term. Given the sharp rally, gold prices may see more muted gains in the near term. However, since we do not expect a strong bull run in equities, we are comfortable maintaining an overweight position in gold.
Silver’s rally has been driven by strong industrial demand from sectors like solar energy, electric vehicles, and electronics, amid a supply deficit that has persisted for four years and is expected to continue this year.
Silver has been in deficit for last 4 years
Source: Bloomberg, Sanctum Wealth
Gold and silver have historically moved together with a 72% correlation. However, with gold’s sharp rally, the gold-silver ratio is now around 87x, above its long-term average of 70x. While it has eased from ~100x in April 2025, we see room for silver to catch up.
That said, silver is far more volatile than gold, even more than Indian equities, with a ~71% drawdown from 2011 highs and nearly double the standard deviation of gold. Given this risk, we recommend limiting silver exposure to below 5% of a portfolio. In our most aggressive model portfolio, we maintain a 3% allocation.
Silver is more volatile than Gold and Equities
Source: Bloomberg, Sanctum Wealth
Gold and silver also have low correlation with traditional asset classes like equity and debt. With structural factors supporting these metals their importance in portfolios remains relevant.
