Another Deadline, another market event?

Another deadline, another market spasm

The markets are exciting enough but trust geo-politics and trade wars to make it even more interesting! The most recent deadline is July 9th. US President Donald Trump has yet again rattled the trade war saber and alerted us to yet another deadline to watch out for. Markets will react inevitably to any adverse outcome if any. To complicate matters trade talks with India are in a state of gridlock over issues relating to US entry into Agri-based products and GM seeds etc. Areas that India considers non-negotiable. Lack of any agreement is likely to revert to reciprocal tariffs that can be placed on India as a result.

News flow from the US on the proposed tax bill continues to be debated within the Republican party with many observers voicing concern on the status of the bill in its current form being not very friendly to renewable energy and its lopsided benefits to the wealthy. Severe cuts in Medicaid are also alarming a lot of people in the vulnerable income bracket below USD61K p.a. and the resulting hardships exposing a schism in the MAGA voter base.

The military conflagration between Russia and the Ukraine shows no signs of abatement and both sides appear increasingly belligerent even in the face of considerable human loss. Cities continue to be targeted by both sides leading to significant damage to facilities and key infrastructure. The direct result of the conflagration is leading western European countries to signal increased spending on defense as the US administration continues to put a price tag on the protection it can offer. Geopolitics in the middle east also continues to create headaches for policy makers as new lines of aggression are being drawn by the protagonists.

Currencies and precious metals too are gyrating to all these changes and at best the situation in global markets can be described as “uncertain”. Asset allocators as a result are reviewing their portfolios and this is leading to considerable churn and change across major portfolios. Interest rates also moving in tandem with currencies is proving a difficult asset class to manage. A more benign expectation of gently falling interest rates is clearly not a story being played out across markets. All in all, quite a regime change in outlook from the start of the year.

Given this trend, investors are faced with a wall of worry that refuses to come down. In the past markets have usually climbed over a wall of worry. Demonstrably, the S&P500 as well as the Nasdaq in the US have climbed to all-time highs already. Cryptocurrencies continue their upward trend, and Gold too seems to have recovered somewhat. Asset portfolios over this time including equities appear quite healthy despite global uncertainties.

So, what should investors focus on?

The long term is area to focus

No matter how difficult current situations seem, equity markets over longer periods always respond to robust earnings. US GDP growth and the recent unemployment figures continue to paint a relatively benign environment, and the US Federal Reserve has signalled a “wait and watch” policy on rate cuts. The expected drop in rates and a softening of the GDP scenarios is not seen to be playing out at least till now. The US was expected to experience a mild recession in the second half of this year and this could be revisited, given current data.

Closer home, the corporate earnings picture is expected to improve in the coming quarters compared to a rather tepid FY25. Government capex is expected to revive in the coming months and a robust demand outlook given a positive monsoon forecast will add to the tailwind already created by the general uptick in the economy.

Markets since September last year have not really recovered to previous highs, but increased expectations of earnings growth and a comfortable interest rate scenario point to a recovery of lost ground in the coming quarters. While abnormal returns are not expected to accrue to equity investors given average valuations across the spectrum, allocation to equities within a reasonable expectation of returns will continue to dominate most portfolios.

The RBI in its most recent monetary policy has allowed for transmission of lower interest rates into the real economy by reducing reserve ratios, allowing for banks to remain liquid in the face of increased credit demand. All these are good signs from a steady growth perspective in the coming quarters

Keep calm and stay invested

We continue to advise investors to remain true to their investment allocation given individual risk appetites and financial goals. On a generic level, equity asset classes like equities for the longer term, remain attractive and short term tactical upsides are visible in short term debt markets given a gently reducing interest rate scenario in domestic markets.

Happy investing!