Seize opportunities in insulated, export-driven sectors amid current market shifts

Indian equities corrected recently due to sustained FII exits

The global economy continues to expand at a moderate pace, with growth diverging significantly across countries. According to the International Monetary Fund’s January 2025 World Economic Outlook, global growth is forecast at 3.3 percent for 2025.

Financial markets have been volatile, with sovereign bond yields showing sharp fluctuations. The US dollar index surged amid tariff-related uncertainty, driving capital outflows from emerging markets and adding pressure on their currencies. Global CPI inflation declined to 5.7 percent in 2024, a 100-basis-point drop from the previous year.

While inflation in advanced economies eased significantly, services inflation remained sticky. Japan is expected to raise rates, while the US maintains a steady stance and Europe explores rate cuts. Key emerging markets such as India and Mexico reduced rates to support growth, while Brazil increased its policy rate by 100 basis points to control inflation.

Emerging themes in markets

Three key trends are shaping global markets in 2025.

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Firstly, the Magnificent 7 stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — have shown signs of slowing down, underperforming the broader market as investor focus shifts to broader equity exposure.

Secondly, European equities are outperforming US stocks this year, driven by value recovery and improved economic conditions.

Lastly, US Treasury yields have declined due to softer inflation data and expectations of Federal Reserve rate cuts. This has improved risk-reward dynamics, enhancing the appeal of US fixed-income investments.

US markets

Market sentiment has been affected by proposed tariffs on imports from Canada, Mexico, China, and Europe, which have heightened concerns about trade disruptions.

Despite these concerns, US GDP grew 2.3 percent in Q4 2024, with full-year growth reaching 2.8 percent. Consumer spending remained strong, but rising unemployment claims and a decline in consumer confidence are emerging risks. The Conference Board Consumer Confidence Index dropped by 7 points in February, marking the steepest decline since August 2021.

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US bonds remain attractive. After four consecutive years of rising yields, conditions for fixed-income investments are improving in 2025. With moderate growth expected and inflation well-anchored, US Treasuries and corporate bonds offer appealing starting yields, providing a buffer against potential yield increases. Bonds continue to be a strong hedge against a potential slowdown, which appears increasingly likely due to policy uncertainty.

India outlook

India’s economic recovery continues to gain strength, supported by positive high-frequency data. E-way bill growth surged to 23.1 percent in January 2025, reflecting improved business activity. Toll collections rose significantly in both volume and value terms. Wholesale automobile sales grew 2.5 percent year on year in January after two months of contraction. The two-wheeler segment recovered strongly, led by higher scooter demand, while tractor sales posted double-digit growth for the second consecutive month. Vehicle registrations also improved across transport and non-transport segments.

The Union Budget 2025-26 emphasises fiscal consolidation, with the fiscal deficit targeted at 4.4 percent of GDP in FY26, down from 4.8 percent in FY25. Capital expenditure is projected to increase by 10.1 percent, focusing on infrastructure, manufacturing, and industrial expansion.

Inflation eased to a five-month low of 4.3 percent in January 2025, while core inflation increased slightly to 3.7 percent. The RBI cut its policy rate by 25 basis points to 6.25 percent to stimulate growth. The RBI’s liquidity-enhancing measures, including a $10 billion dollar/rupee swap and variable rate repo auctions, have helped stabilise the financial system. Forex reserves remain robust at $640 billion, covering over ten months of imports.

On the external front, India’s current account deficit (CAD) improved to 1.2 percent of GDP in Q2 2024-25, down from 1.3 percent a year earlier. Remittance inflows reached $129.1 billion, reinforcing India’s position as the world’s top remittance recipient. These inflows, coupled with strong forex reserves, have provided stability to the INR despite global currency pressures.

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Indian equities corrected recently due to sustained FII exits, but this presents an opportunity for value accumulation. Investors are encouraged to accumulate quality large-cap and mid-cap stocks over the next 3–4 months and stay patient for potential rewards over the coming years. The constructive outlook on equities is supported by two key drivers: the Union Budget’s focus on fiscal discipline and capex momentum, and the RBI’s pivot toward supporting growth through liquidity infusions and rate cuts.

In the ongoing accumulation phase, investors may focus on sectors that are relatively insulated from external risks, alongside those with strong export-driven prospects. PSUs, Infrastructure, and Industrials are emerging as promising sectors, while Consumption, IT, Pharma, and Private Banks/NBFCs remain stable investment themes.

The Indian bond market also stands to benefit from the government's disciplined fiscal consolidation path and the RBI’s renewed focus on liquidity management. The fiscal deficit target of 4.4 percent for FY26, coupled with a stable net borrowing program, enhances the bond market's outlook. AAA-rated corporate bonds with 2–3-year durations currently offer yields exceeding 7.35 percent, creating attractive investment opportunities for stable returns. India’s inclusion in global bond indices further supports demand for domestic fixed-income instruments.

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The writer is the founder of StatLane.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.