Markets to remain range-bound over next few months, Street 'blissfully ignorant' of reality: Kotak

The global outlook is highly uncertain in light of the ongoing trade tensions.

The benchmark indices Nifty 50 and Sensex, along with their large-cap peers are likely to stay range-bound over the next few months, given the lofty valuations across the markets, low consumption and global uncertainties, according to Kotak Institutional Equities' Sanjeev Prasad.

In a report titled 'Stuck!', Prasad, once again, detailed the high valuations, calling Dalal Streel 'blissfully ignorant'. "The Indian market remains blissfully ignorant of the reality of a sluggish domestic outlook with likely continued weakness in consumption demand and likely slowdown in investment demand and a challenged global macroenvironment with likely low growth and possibly high inflation," the report said.

The report noted that valuations of the Indian market and of most sectors and stocks are quite rich and well above fair values based on any sensible valuation framework. This would suggest that investors, both institutional and retail, are yet to reconcile with the new reality.

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According to Kotak Institutional Equities, valuations have stayed at high levels across stocks and sectors, despite earnings downgrades. This, to the brokerage, suggests that either the market does not care about valuations and/or the market does not care about earnings.

"In our view, this nonchalant attitude perhaps reflects the market’s confidence in retail investors sustaining their hitherto price-agnostic purchase of stocks through mutual funds and FPIs staying positive on Indian equities based on a ‘narrative’ of a lack of alternatives in EMs," the report added.

Further, the research firm also expects a slowdown in India’s GDP growth, with a modest recovery in consumption being offset by likely lower growth in investment. "We would note that strong government and household capex over the past 3-4 years and robust consumption in high-income households in the past two years have driven GDP growth while weak consumption in low-and-middle-income households has been a drag on overall GDP growth."

Along with high equity valuations and economic slowdown, Kotak Institutional Equities also noted that the global outlook is highly uncertain in light of the ongoing trade and tariff war between countries. "The flip-flop policies of the US administration on the tariff issue have created a great deal of uncertainties with respect to global growth and inflation."

Global and Indian markets have already priced in the best-case scenario of the US and its major trade partners, including India, concluding trade agreements before the July 9 deadline. However, Prasad pointed out that it is pertinent to note that the U.S. has closed only one trade deal: the U.K.

"Our base-case scenario is that the US will impose tariffs (minimum 10 percent) on all its trading partners. In a realistic scenario of dragged-out trade negotiations, the market could be volatile based on news but struggle to break out of a certain range," the report added.

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Nevertheless, there are a few possible triggers that could lead to a moderate recovery in the markets, ranging from the RBI trimming the benchmark lending rate and weaker commodity prices.

The brokerage expects another 75-100 bps rate cut by the RBI in the current rate-cutting cycle, following the cuts of 25 bps each in February and April 2025. "We model CPI inflation averaging 3.5 percent in FY2026 and core inflation averaging 4.4 percent," the note said.

Furthermore, commodity prices are likely to be subdued given a likely weak GDP global outlook, which may be a moderate positive for the Indian economy, if not for market earnings.

"We note that the lower commodity prices will be a positive for the Indian economy, as India is a net importing country of commodities. Commodity prices have corrected sharply on concerns about global GDP growth."

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