Building a ‘Tower of Babel’

2025 is a perfect square (45^2). But the year hasn’t started on a perfect note for investors of Indian Equities.

What’s not working:                                                                                                                                       

• Dollar Index touching 110 – The strong dollar is putting a lot of pressure on all currencies globally and more so on the Indian Rupee. INR depreciated only 2.8% against the USD in 2024. Contrast this with depreciation in other currencies like Brazilian Real -21.6%, Russian Ruble -18.6%, S. Korean Won -12.4%, NZ Dollar -11.4%, Aus Dollar -9.1%, etc. From the start of this calendar year, INR has shown weakness and currency seems to be reacting belatedly to Dollar strength. As the Trump era draws near, the US Dollar has been rising sharply assuming that higher trade tariffs will kick off immediately. This might seem an overreaction which we will only get to know post 20^th of Jan!

• US Bond yields: US 10-year yield rising sharply back to 4.7% from a low of 3.6% seen just a few months back is spooking the markets. US yields spiking despite Fed cutting interest rates by 75 bps, hasn’t gone down well with markets. This clubbed with an appreciating Dollar means that risk-free return from US Treasury could easily be about 8% for FIIs (5% yield and 3% currency appreciation). This is leading to FIIs pulling out of Indian markets and moving back to safer assets in the US.

• Strong US macro data: A strong set of macro data continues to come out of the US. Unemployment is lower, new job creation is robust, and wage growth is modest – all of this is pushing economists to believe that we might not see more rate cuts in the US for some time now. And yes, inflation seems to be roaring its head back. In fact, few experts have gone as far as suggesting that we might see a rate hike cycle in this calendar year! This again does not augur well for riskier assets in general and Equities in particular.

• Crude playing crude: Oil is slowly back to the $80 mark. To make matters worse, there are enhanced sanctions on Russian oil companies now which might have a direct bearing on Indian oil imports from Russia in a few months. This could lead to prices of Indian crude baskets going up and put pressure on already stressed Government finances.

• Corporate earnings: The full financial year earnings growth of Nifty companies is expected to be in the single digits this financial year. Consumption is slowing down and Government spending has been much lower than budgeted for this year.

• Valuations: Nifty 50 is trading at about 20 times 1 yr forward which is at par with 10-year average levels. However, Nifty Midcap 150 is trading at 31 times and Nifty Smallcap 250 is trading at 25 times 1 year forward PE. These are certainly expensive and in certain pockets fairly frothy.

• Indian Monetary Policy: RBI is yet to open its door to rate cuts in India. Persistently high inflation is keeping the central bank on tenterhooks. Higher rates in turn have started impacting the lower credit of society which is evident from the stress in the MFI and NBFC space.

So, in a nutshell, it’s a complex quagmire of factors which is impacting Indian markets right now. Both Global and domestic factors have combined ranks to deliver a body blow to the markets.

What can possibly arrest this fall:

• Trump: Trump chatter could be more bark and less bite. Markets would gladly take any softness instance from what has been spoken. Already signals are emerging that Import tariffs might not go up suddenly but Trump will take a pragmatic call in a step-wise manner on that.

• DXY: IF the Dollar Index softens back to the 106 level, this could trigger a quick short-term recovery in the markets. The Dollar Index has retraced back to 109 levels.

• Geo-politics: If Donald Trump is successful in ending the Russia-Ukraine this could ease off a lot of geo-political worries from the markets. Already this morning, we are hearing news of the Israel-Hamas ceasefire. After all, who does not like a safe, peaceful, and prospering Globe!

• Union Budget: India’s annual budget will be out on the 1st of Feb. This could revive the animal spirits again if the Govt capex number is good. Also, markets will keenly look for the Fiscal deficit number (4.9% for FY25 and a projection of 4.6% of GDP for FY26). Any improvement here could be hugely positive as well. Other areas to watch will be govt measures to revive consumption and boost employment. As far as taxation is concerned, markets would happily take no change as great change 😊

• Elections: The union budget will be followed by State elections in Delhi. This election isn’t significant mathematically but symbolically a win for the BJP here could mean a continuity mandate for the ruling party and stronger policymaking going ahead.

• MPC: Finally the most keenly watched event in Feb will be the RBI Monetary Policy meeting under the new RBI governor Sanjay Malhotra. Will the new Governor go for a rate cut in his first policy itself? Only time will tell but a rate cut with dovish commentary could be a good trigger for markets.

Nifty 50 has corrected 12% from peak levels and Nifty Mid/Small cap indices have corrected 13-15% from 52-week highs.

From a sectoral perspective, standout performers have been the IT, Pharma, and Healthcare sectors which have corrected just 5-7% from peak levels. Worst hit sectors have been Media (-33%), Energy (-27%), PSE (-26%), PSU Banks (-27%), Oil & Gas (-23%), commodities (-23%) and Realty(-22%).

From a style perspective, Momentum (-21%) and Alpha (-19%) are the worst hit – understandably so given the high beta approach of these styles. All other styles like quality, low volatility, equal weight, and value are down anywhere from 10-15% from their peak levels.

To sum it up, corrections in the market have been fairly broad-based percolating down to most of the sectors, styles, and market caps. 2025 could perhaps be the year to separate the wheat from the chaff. We believe that the year ahead might not give us a broad-based rally but will surely provide reasonable tactical plays and opportunities in niche pockets.

For investors in the accumulation phase, this could be the year to lay your head down and keep putting incremental money to work at attractive lower levels.

For investors in preservation mode, this year could be tricky and one has to carefully rebalance the portfolio towards more safety.

For investors looking out for tactical opportunities in this market, we are opening up a few tactical allocation strategies. To know more about that and be a part of our ‘Tactical club’  reach out to us at support@moneyfront.in

The last perfect square year was 1936 and the next will be 2116! One has to be extremely lucky to witness two perfect square years in a lifetime. And that just shows, how difficult it is to strive for perfection!

Markets are imperfect and asymmetrical and so will be returns. For nine consecutive calendar years, investors have been building a self-fulfilling mythical ‘Tower of Babel’ thinking it would keep growing taller and touch the skies. Just to realize painfully that nothing is infallible and surely not the markets! Markets could very well give a 10^th consecutive positive calendar year in 2025, but will this ‘Tower of Babel’ continue to rise with markets making a new high — is a difficult one to answer!

Moneyfront family wishes you a very happy and blessed 2025!