Oct 15, 2025
• H-1B visa fee hike and 100% tariffs on branded/patented drugs have limited impact on Indian cos.
• Maintain neutral equities as most parameters are balanced; earnings recovery needed for momentum.
• Upgrade mid-caps to neutral from underweight due to improved valuations and relatively stronger earnings.
• Maintain overweight in gold despite partial profit-taking; also realized partial gains in silver.
Looking Inwards
Despite global challenges, India remains focused on boosting domestic demand. Following an 50% tariff hike, President Trump has announced two additional measures that appear targeted at India: a 100% tariff on imported branded and patented drugs and a USD 100,000 fee on new H-1B visa applications. However, these are expected to have limited near-term impact on Indian firms. While global headwinds persist, India’s priority should be to strengthen its internal economy while managing external pressures through active diplomacy and trade engagement.
Amid these developments, the Sanctum Investment Committee reviewed its proprietary asset pair model which guides our tactical asset allocations. The model signals a neutral view on equities and a slight positive bias toward gold. Mid-cap scores have improved to neutral, while bond preferences remain balanced across segments. While we are booking some profits on gold and silver, we continue to hold an overweight in gold and some tactical allocation to silver.
Global Macro Update
In its September meeting, the Fed cut rates by 25bps, in line with expectations, marking its first rate cut of 2025. Fed Chair Jerome Powell described the move as an “insurance” cut, signalling a data-dependent approach going forward. While the dot plot indicates the possibility of two additional cuts this year, the FOMC remains divided with some members favouring aggressive easing, while others worrying about rising inflation risks.
The Fed’s challenge lies in its dual mandate: promoting maximum employment and maintaining price stability. Typically, it focuses on one objective at a time, but currently both are moving in opposite directions. The labour market shows signs of weakness, while tariffs could push prices higher. The Fed appears to be navigating a delicate balance.
The US government entered a shutdown on 1 October 2025 after Republicans and Democrats failed to reach an agreement on spending and healthcare priorities. The shutdown is estimated to cost around USD 400 million per day in lost wages for roughly 750,000 furloughed federal employees. It may also delay key economic data releases which complicates the Fed’s policy decisions further and adds to market volatility as investors try to formulate trends basis available data. Markets currently expect a short disruption of under two to three weeks with limited economic impact. The risk is that the highly partisan political environment in the US could result in a prolonged standoff, potentially weighing on growth and prompting deeper rate cuts by the Fed.
US government shutdowns historically have been short-lived
Source: US Treasury, Invesco AMC
The government shutdown has delayed the release of the September 2025 jobs report, a key indicator watched closely by the markets. Private estimates point to a modest rebound in hiring, though overall labour market conditions remain weak. The housing sector also reflects growing economic strain, with rising inventories and longer selling times, typically an early signal of slowing activity. Consumer confidence surveys highlight concerns over high prices, a softer job market, and worsening personal finances. Yet, retail sales rose 0.6% month-on-month, indicating that consumer spending remains resilient despite economic uncertainty. Overall, the US economy is still holding up, but signs of underlying weakness are becoming more evident. Uncertainty has deepened as the existing concerns around tariffs, government layoffs, and Fed independence are now compounded by the government shutdown.
Global Market Update
Global equity markets ended higher in September, supported by the Fed’s rate cuts, sustained AI optimism, and a slight easing in trade tensions. The S&P 500 hit multiple record highs, while the Nasdaq gained over 6%. US small-cap stocks also outperformed, with the Russell 2000 rising more than 16% over the past quarter.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in USD terms
Chinese equities have performed strongly in recent months, with the Hang Seng Tech Index up nearly 45%, second only to gold. The upcoming 20th CPC Central Committee meeting (20–23 October 2025) will outline the 15th Five-Year Plan (2026–2030) and is expected to focus on technological self-reliance, upgrading domestic consumption, accelerating the energy transition, and improving local government finances. Alongside this long-term strategy, the government has introduced more targeted and sustainable measures to stabilise the property sector. While these steps may take time to show results, they reinforce the case for continued, albeit more measured, Chinese equity outperformance.
Japan has elected Sanae Takaichi as its first female President, who is widely viewed as supportive of pro-growth fiscal policies. The country also benefits from ongoing corporate reforms, developed-market stability, and reasonable valuations.
We continue to emphasize the importance of global diversification and caution against concentrating international exposure solely in the US.
India Macro Update
Although often called the “Indian IT visa,” the H-1B’s significance to Indian IT firms has declined over the past decade due to increased local hiring. Today, H-1B holders constitute just 3–5% of Indian IT workforce. Big Tech companies (Google, Amazon, Microsoft, Meta, etc.) now account for a larger share of new applications. FY26 visa applications are finalized, while the new USD 100k fee will apply from FY27 onward. Reduced H-1B applications amid localization may lower on-site revenues but also cut costs, potentially improving margins for these IT companies as offshore work is more profitable. Overall, profitability impact is expected to be marginal over the medium term despite slower revenue growth.
Unbranded generics make up most of U.S. exports (~90-95%) by Indian pharma companies, so pure-play generic firms are largely insulated. Companies with both generic and branded portfolios face some revenue and margin risks, but most already have U.S. manufacturing operations. As a result, the immediate impact is limited, though they may need to consider expanding U.S. capacity or diversifying into alternative markets, potentially through acquisitions.
At its policy meeting on 01 October 2025, the RBI kept rates unchanged and maintained a neutral stance, as expected. However, it struck a mildly dovish tone by lowering inflation forecasts and highlighting risks of growth moderation in H2FY26 and beyond.
In recent months inflation has consistently undershot expectations, driven by subdued food prices and a favourable base. As a result, the RBI revised its FY26 inflation forecast to 2.6% (from 3.1%) and now projects FY27 inflation at 4.5%, with Q3FY27 at 5.1%. The RBI highlighted that despite external headwinds from trade tariffs, domestic growth remains resilient, supported by a favourable monsoon, easing inflation, monetary accommodation, and recent GST cuts. FY26 GDP growth was revised up to 6.8% (from 6.5%), though a slowdown is expected in H2. FY27 growth is projected at 6.6%.
Inflation forecast revised down again
Source: RBI Monetary Policy Document
The RBI acknowledged that policy space has emerged to further support growth. However, it prefers to evaluate the impact of previous rate cuts and recent fiscal measures before taking additional action. While markets are pricing in a potential rate cut in December, the RBI is expected to remain data-dependent, with any further easing contingent on more definitive signs of growth slowdown.
Indian Market Update
Indian equities gained in the first half September but gave up most gains in the second half. Mid and small- caps outperformed large caps marginally. FPIs withdrew around USD 2.7 billion during the month, taking year-to-date outflows to USD 17.6 billion. Consumption-oriented sectors gained on the back of GST cuts, whereas IT and pharma stocks declined.
Source: Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
The government announced its H2FY26 borrowing calendar, with gross market borrowing about INR 5,000 crore lower than budgeted. Notably, ultra-long maturities (30-50 years) will see reduced borrowing, while 10–15-year borrowing will rise slightly. This caused yields on 30-year and longer bonds to fall by a few basis points, while the 10-year yield rose 5bps. In the post-monetary policy presser, the RBI governor expressed concerns over the high 10-year yield, hinting at potential measures to ease it. This prompted a 5bps decline in the yield on 1 October 2025.
Tactical Asset Allocation | Quarterly Asset Pairs Review
Equities vs Bonds
Valuations expensive, macro and earnings likely to improve in coming quarters.
In recent years, the government has focused on supply-side measures such as fiscal prudence, capital expenditure, inflation control, deleveraging of banks and corporates and structural reforms, which have supported macroeconomic stability even as many other countries face fiscal deficit challenges. With the trinity of tax cuts, GST reforms, and lower interest rates, the policy focus has now shifted to reviving demand. While the recovery may be gradual, we believe, or at least hope, policy makers are ready to do more if needed.
These demand-side measures should support earnings recovery in the coming months. GST cuts are expected to boost consumption volumes, especially in automobiles. The GST transition may compress margins for consumer companies in Q3FY26, with benefits expected to show in Q4FY26 results and onwards. Improved loan growth and NIMs may drive earnings recovery for banks and NBFCs. However, IT sector earnings could remain muted due to weak demand, while industrials may see limited growth amid weak capex and external demand. Overall, FY26 is likely to close with high single-digit earnings growth, followed by 11-13% growth in FY27. The cuts in EPS estimates have also come off suggesting the worst of earnings may be behind us.
EPS estimate downgrades have eased
Source: Bloomberg, Sanctum Wealth
Consensus Bloomberg EPS estimates rebased to 100 as of 30th September 2024
While US tariffs pose a risk, less than 4% of sales for all BSE500 companies come from goods exported to the US. Therefore, the direct impact of these tariffs on earnings growth for Indian listed companies is limited. Similarly, as previously noted, the effects of the H-1B visa changes and pharma tariffs are also expected to be minimal.
Additionally, valuations have also eased somewhat compared to historical levels and emerging market peers. The trailing earnings yield to bond yield ratio is at its 10-year average, while the forward ratio is only slightly above. India’s premium over MSCI Emerging Markets is also near its average, indicating that overall valuations are close to fair value zone.
Over the past year, despite a largely flat to negative market performance, domestic fund flows have remained broadly stable even as foreign investors have been net sellers. Promoters have been the largest sellers, driven by ongoing IPOs and rights issues. The market staying flat despite strong domestic inflows shows that flows alone cannot push markets up; instead, earnings play a bigger role.
Promoters have been larger sellers than FIIs
Source: Bloomberg, Kotak Institutional Resaerch
Direct retail flows as per NSE data,
Overall, we believe the various factors are well balanced and therefore maintain a neutral stance on Indian equities. While the risk of a sharp price correction is limited notwithstanding any major global shock, a time correction is likely. As earnings recover, equity momentum may improve.
Mid-cap valuations have declined, and earnings growth prospects appear stronger compared to large and small-caps. While EPS revisions have been sharper for mid-caps, their Q1FY26 earnings remain better than large caps. Small-caps, on the other hand, are the worst performing, with valuations still high and earnings disappointing. However, it is important to note that the small-cap universe is much broader and not adequately represented by the small-cap index. Hence, we move to a neutral stance between large and mid-caps from underweight mid-caps earlier. Due to the greater dispersion in valuations and earnings growth within mid and small-caps, we recommend gaining exposure to these segments through active funds only.
Midcap valuations have moderated
Source: Bloomberg, Sanctum Wealth
Fixed Income
Accrual over Duration
We believe the bar for a rate cut is high this year unless there is a clear slowdown in economic activity. The RBI may consider cutting rates in Q4FY26, once the full impact of GST cuts is visible. In the meantime, the RBI appears committed to supporting liquidity. Of the 100bps CRR cut announced, 75bps is still to come, which should help keep short-term rates stable Currently, the yield curve presents an attractive spread between short- and long-term bonds. The RBI governor’s comments on the 10-year G-Sec also suggest possible steps to manage yields. Additionally, reduced supply of ultra-long bonds, as per the H2FY26 borrowing calendar, is supportive of long-duration bonds. While there may be some gains in duration, they are unlikely to be large enough for most investors to chase. For most, actively managed mutual funds, such as corporate bond funds, remain the best way to benefit.
Yield curve remains steep and reasonable short-term credit spreads
Source: Bloomberg, Sanctum Wealth
Credit spreads, particularly at the shorter end of the yield curve (under 3 years), are near historic highs. However, the upgrade-to-downgrade ratio has declined slightly, signalling some weakening in credit quality. While most high-quality borrowers maintain low leverage, the concern lies with lower-rated borrowers. The rapid growth of private credit may have led to weaker lending standards. Anecdotal evidence points to looser covenants and aggressive pricing. We have been flagging these risks for some time and remain highly selective in this space.
Credit quality trends starting to weaken
Source: Bloomberg, Sanctum Wealth
USD vs INR
Dollar weakness likely to continue
The INR has continued to weaken even as the US dollar index (DXY) has softened in recent months, indicating that the rupee has underperformed relative to other major currencies. The real effective exchange rate (REER) now appears more competitive. During this period, the RBI has rebuilt its foreign exchange reserves, but its actions suggest a focus on curbing volatility rather than defending any particular level. Looking ahead, the resumption of Fed rate cuts and rising concerns about the Fed’s policy independence could lead to further dollar weakness. However, foreign capital that exited India in July and August following the tariff-related shock has yet to return, despite GST cuts. This persistence of capital outflows implies that the rupee may stay under pressure even in an environment of a softer dollar.
Gold vs Cash
Fundamentals remain supportive
Gold’s multi-year rally has made it expensive relative to most commodities and asset classes. Central banks, a key driver of gold rally, after a brief pause in July, added a net 15 tonnes of gold to their reserves in August. Although the pace of buying has moderated, interest remains strong, with several new central banks joining the trend. The People’s Bank of China continues to be a major buyer, yet gold accounts for only about 7% of its total reserves. In contrast, Poland’s central bank has increased gold’s share of its reserves from 20% to 30%, making it one of the most active recent buyers.
ETFs have also supported demand, recording a third straight month of inflows in August. With signs of a US economic slowdown, rising inflation risks, and expectations of a weaker dollar, gold’s long-term fundamentals remain favourable. However, technically gold appears to be in overbought zone after such a sharp rally. This suggests some pullback in the near-term is likely. Those could be good buying points for those under allocated.
Silver’s rally has been even steeper, particularly over the past 4–5 months, supported by fundamentals such as a persistent supply deficit and favourable gold/silver ratio. However, given the sharpness of the recent move and silver’s higher volatility, we recommend maintaining only a tactical allocation to it.
Global central bank monthly gold buying
Source: Bloomberg, Sanctum Wealth
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).
From an asset allocation perspective, we have turned more balanced in our equity stance. After maintaining an underweight position in mid-caps since mid-2024, our view has now turned neutral. We plan to add exposure selectively, primarily through flexi-cap and large-and-mid-cap funds, as we expect markets in the coming months to be more bottom-up driven.
We have maintained an overweight position in gold since the onset of the Russia-Ukraine conflict over three years ago, which has meaningfully benefited portfolios. Around four months ago, we added silver to our Enhancement and Generation portfolios, and it has since risen nearly 45% from our entry point. We are now booking partial profits in gold and silver. Nevertheless, we remain overweight on gold across portfolios and continue to hold a 1.5% position in silver across the Enhancement and Generation portfolios.
Gold and Silver allocations have benefited our portfolios
Source: Bloomberg, Sanctum Wealth
REITs and InvITs have rallied sharply this year; IndiGrid InvIT is up about 18% year-to-date, while REITs have gained 10–25% over the past nine months. Our portfolios hold Embassy REIT and IndiGrid InvIT. While most capital gains appear to be priced in, we continue to hold these positions given the limited availability of tax-efficient debt alternatives for SMAPS. For investors with alternative options, this may be an opportune time to book profits.
We exited our tactical PSE Index exposure, which did not play out as expected, and shifted to the Samco Multi-Asset Fund. We view this not as a traditional asset allocation fund but as a momentum play across equity and gold which is currently favouring gold but also positioned to capture stock-specific momentum within equities.
We are increasing our allocation to the Nifty Private Bank Index by 2.5%, funded from Nifty 50, as we see potential for earnings growth and attractive valuations.
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
