Along with Trump tariff threats, Anil Rego, the Founder and Fund Manager at Right Horizons foresees four risk factors for the equity markets in the rest of H1-2025 including corporate earnings, FII outflows, and global macroeconomic uncertainty.
According to him, a strong dollar and higher US yields could lead to capital outflows from Indian markets, affecting equity valuations.
Further, if earnings growth does not justify these valuations, there could be further correction in the equity, he said, adding, a slower-than-expected rate cut cycle or persistent inflation in the US could tighten global liquidity and impact capital flows into emerging markets like India.
Rego, a seasoned investor with more than three decades of experience, believes pharmaceuticals, specialty chemicals, auto ancillaries, IT & software services are likely to witness better exports growth relative to other industries.
Do you think the Trump tariff risk will keep the bears active on Dalal Street, at least for the first half of 2025?
The tariff threats from US President Donald Trump have introduced volatility into Indian markets, with concerns that these policies may sustain bearish sentiments on Dalal Street.
Indian pharmaceutical industry
Reciprocal tariffs are expected to have a limited impact on India's pharmaceutical exports since the country maintains a trade surplus in medicines with the US. The annual price erosion of 10-11% has already lowered drug costs for American patients. Once implemented, the tariffs would likely be passed on to consumers, leading to higher medication prices. Indian pharmaceutical products make up approximately 44% of the US pharma market by volume and account for 47% of generic prescriptions.
As a result, replacing Indian manufacturers solely through tariff hikes would be challenging and we believe the bilateral trade agreement is a work-in-progress since a detailed announcement by US president is expected on April 2.
Steel Exports
India's direct steel exports to the US was relatively low in CY24, accounting for about 4% of total exports. Consequently, the direct impact of US tariffs on the sector’s sales volume is expected to be minimal. However, an indirect impact on realizations could arise if major steel-exporting countries redirect their shipments to India, increasing supply and exerting downward pressure on prices.
Apart from tariffs, do you see any other risk factors for equity markets in the first half of 2025?
Foreign Portfolio Investment (FPI) Outflows
A strong dollar and higher US yields could lead to capital outflows from Indian markets, affecting equity valuations.
Corporate Earnings & Valuations
Indian equity valuations remain elevated compared to historical averages. If earnings growth does not justify these valuations, there could be further correction.
Global Macroeconomic Uncertainty
US Federal Reserve Policy: A slower-than-expected rate cut cycle or persistent inflation in the US could tighten global liquidity and impact capital flows into emerging markets like India.
Geopolitical Tensions
Escalations in global conflicts (such as Russia-Ukraine or Middle East tensions) could disrupt energy markets and supply chains, leading to inflationary pressures.
Rising US-China tensions over trade, technology, and Taiwan could add to market volatility.
Are you bullish on export-oriented sectors considering the current environment?
Outlook on export-oriented sectors is mixed given the current macroeconomic environment. While some sectors could benefit from global trends, others may face headwinds due to tariffs, slowing global demand, and currency risks.
Pharmaceuticals, Specialty Chemicals, Auto Ancillaries, IT & Software Services are likely to witness better exports growth relative to other industries and we believe if global demand strengthens in H2 2025 and rate cuts materialize, broader export-driven sectors could see a rebound.
Do you expect the disappointment seen in Q3 earnings to continue in Q4 as well?
The market correction has coincided with a slowdown in earnings growth with a third consecutive quarter of low single-digit earnings growth, as the Nifty 50 has managed only 4% PAT growth in 9MFY25 (following a healthy 20%+ CAGR during FY20-24). The Q3FY25 corporate earnings was modest, driven once again by BFSI, with positive contributions from Technology, Telecom, Healthcare, Capital Goods, and Real Estate. The Nifty EPS estimate for FY26E & FY27E was reduced and we expect earnings to grow albeit subdued rate and expect selective quality names to grow at healthy pace.
Do you foresee a challenging environment for the financials space?
The banking sector delivered another subdued quarter, impacted by margin compression and persistently high provisioning costs, particularly for private banks. Net interest margins (NIMs) declined further due to rising funding costs, while intense competition for deposits continued to strain liquidity. Additionally, the CASA ratio weakened, reflecting a shift toward higher-cost term deposits. Public sector banks also faced some NIM contraction, though the impact was relatively limited compared to private banks.
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