Moneycontrol Pro Panorama| A hole in the punch bowl

The markets needed a reason to fall and the US Fed rose gallantly to the occasion.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

It was not as if Indian equities were on an upward march that could get tripped by the US Fed’s hawkish New Year 2025 greetings. The Sensex had shed 2.4 percent as of close on December 18 over its recent December 13 high mark. But it was down by 1.2 percent (at 1.20 pm) on Thursday, December 19, giving company to miserable global markets after the US Fed meet outcome. It did better than the Dow that fell by 2.6 percent on Wednesday (but US markets were on a tear of late), Indonesia and South Korea, but underperformed relative to China.

What spooked investors? Before we get there, it’s useful to get a dipstick view of what global fund managers were making of markets before the Fed event occurred. The BofA survey of fund managers provides us just that. Blame Donald Trump’s convincing victory and his pro-business, pro-Wall Street image for a rush of money into equities. The allocation of more money to US equities has led to record low cash allocations that saw the BofA survey triggering a sell signal. Manas Chakravarty parses the data and the key messages, making this crucial point, “The survey says that the only times cash allocation among global fund managers was near December 2024 levels were back in January-March 2002 and in February 2011, which were huge tops in risk assets”.

Therefore, one could say the markets needed a reason to fall and the US Fed rose gallantly to the occasion. The Fed did cut interest rates by 25 bps as expected, but if the meet began with four expected rate cuts in 2025 that fell to only two rate cuts of 25 bps each. Our analysis by Anubhav Sahu looks at what may have caused the scaling back of expectations and more crucially, what it means for Indian equities. There are several factors investors are already grappling with, to which one more has got added. Do read to know more about what he says about the style and sectors investors should build into their portfolios to make them more resilient.

Bond and currency markets are understandably going to get affected by these developments. Just yesterday, Aparna Iyer had written about how the party for bonds seems to be getting dampened by FIIs developing cold feet. She had written about how a narrowing rate differential between the US and Indian bond markets meant that investors had more incentive to move money out. The Fed decision could cement that trend. The pressure on the rupee could make things worse. Today, the USD/INR rate crossed the 85-mark. Read her take here, especially if you missed it yesterday.

On the currency again, we have fund manager Pankaj Pathak weighing on whether the depreciation represents an opportunity. The RBI’s moves to maintain an orderly exchange rate movement has an impact on liquidity in the system with implications for the money market. He then trains his lens on what fixed income investors should do under these circumstances. And even if the RBI lowers the policy rate, if market conditions remain like this what are the pockets of opportunity? Read here to find answers.

Even as investors may curse the Fed for pouring cold water over the year-end returns, if the downtrend continues, they should remember that the halving of expected rate cuts in 2025 is just that, a pruning of expectations. We live in such volatile times that it’s difficult to predict what’s going to happen next month, leave alone next year. While it’s good to let some air out of bubbles, if they are forming in some corner of the market, it’s good to see what’s worrying the Fed and what could change.

Inflation is an obvious problem and while the job market may remain a tad soft, core inflation appears to have edged up. But this see-saw of the blow-hot-blow-cold data has become somewhat of a regular thing of late. What’s really changed for the US market is Donald Trump’s ascent to the presidential throne, mainly what his tough talk on tariffs, that he usually follows up with action, could mean for inflation. Robert Armstrong writes in the FT (free to read for subscribers), “Together they say that while possible Trump policies did not enter into the rate decision, they did enter into the SEP (Summary of Economic Projections). In spirit, though, they are inconsistent, because in central banking, expectations are policy.”

In effect, if Trump’s actions lead to fears of their impact on inflation coming true, then rate cuts could become scarcer in 2025 as projected. But, if Trump manages to do enough to keep inflation down even while rolling out some of his electoral promises, that could give enough comfort to the FOMC members to become less hawkish. While this event falls into the ‘time will tell’ category, what investors can be fairly certain of are sudden, sharp market movements in the near future, as both data and Trump’s lips (and those of his lieutenants) will be watched very closely.

Investing insights from our research team

Concord Enviro: Can the water treatment IPO make waves for investors?

Transrail Lighting IPO: A right mix of growth and valuation

DAM Capital: Will the IPO strike a deal with investors?

Sanathan Textiles IPO: A fabric of growth or stitches of risk?

What else are we reading?

Options trading curbs: A case of throwing the baby out with the bathwater

The import risk Chinese overcapacity poses to Asian countries

Soft raw material prices to support record profit margins of pharma companies

Startup Street: 2024 -- A year when Indian startups thrived amid global turmoil

US-China antimony trade war reflects a weaponised industrial reliance

Corporate Japan is steeling itself for hostile interest (republished from the FT)

Delhi can electrify its path to clean air

AAP expands sops for women ahead of Delhi polls, following recent election trends

Building Resilient Startups: A shift towards sustainable growth in India’s ecosystem

VFS Global needs to be scrutinised by the competition regulator
Tech and Startups

Conditions apply - Handful of IT firms may face import restrictions on laptops, PCs

Technical Picks: BANKNIFTY, IPCALAB, IFCI

Ravi Ananthanarayanan
Moneycontrol Pro