Mid Year Outlook

“May you live in interesting times” — Commonly attributed as a Chinese curse; however only apocryphal

A mid-year outlook

As we come to end of the first half of this year it does help to look back to review what has happened in the markets so far. It has been an incredibly busy start to the year with so much happening across the world as well as in India over the past few months. Compared to such a barrage of events, the summer months may yet pass without much incident, though this remains a wish, given the potential for turmoil yet possible to unfold.

The scale of events that rocked the markets from the start of year are remarkable – from the start of a virtual trade war to brinkmanship in geo-politics to natural disasters (remember the LA fires?) to riots now and the continuing issues surrounding immigration in the US, it has been indeed a rocky ride.

Looking ahead there is reason to remain optimistic. For one, the worst-case scenarios – whether in the trade war, or in geopolitics have been visited. And everyone seems to have moved away from those to more palatable positions than before. On the trade front, countries have engaged with the US administration and worked to come to some common ground, though on the current US-China talks, precious little progress seems to have been achieved. Supply chains have been alerted to possible alterations though not much seems to have changed on the ground. Diversification in supply chain seems to be a given going forward. These have winners and relative losers in countries and companies.

On the geopolitical front the conflagration in northern Europe continues to escalate and there appears sharp deviations in positions on the conference table and on the battlefront. While both sides appear to desire a respectable end to the hostilities (whatever that may mean) the sharp increase in military action is in deep contrast to the same. However, it appears that light at the end of the proverbial tunnel may well be in sight. Nearer home, de-escalation between India and Pakistan has been markedly acute and both sides have made it clear that this is the way forward, at least for the foreseeable future. This has cooled markets and currencies across the board.

Interest rates and inflation appear to be cooling down, earnings and employment appear stable, with the threat of a major breakdown in trade going away, manufacturing, may yet bounce back. Consumer sentiment is still a little weak and the specter of a mild recession in the US as well as steady inflation cannot be ruled out. Given this scenario, global investors are already looking to diversify assets out of the US centric tilt they had preferred in the past few years. As Europe looks to invest in defense expenditure there may be a revival of industrial activity fuelled by domestic trends.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

What should investors in India be mindful of?

Positive tail wind

The RBI has front ended growth impetus by cutting policy rates in the most recent monetary policy. This has led to a sense of confidence among market participants that sufficient elements for a growth revival are provided. The cut in the CRR is salutary as it signals the readiness to provide a transmission of lower rates into actual credit flows with availability of liquidity with the banks. The fuel is ready if needed.

FY25 ended on a tepid note for a large swathe of corporate India on the back of moderating growth and narrowing margins given slower demand across the economy. Going forward the rate of increase in corporate profits on a YoY basis will be sharp given base effects and revival of demand in the coming months. The demand revival is expected on the back of rural optimism driven by expectations of an “above normal” monsoon and easier credit flows given lower rates that may fuel urban and rural consumption of consumer goods and services. Both real estate and automobiles are direct beneficiaries of lower interest rates.

Revival in government capex may yet be another wood in the fire already lit by returning domestic demand. Large orders in capital goods, defense and related fields may keep optimism high in these sectors.

The worst appears over for now

While the headline does indicate a more sedate time in the markets, risks can never be adequately predicted. Solid performers of last year, Gold, Bitcoin and alternative assets may yield this year to more conventional financial assets doing better on the back the above change in the economic scenario.