October proved challenging for domestic equity markets, as mounting concerns over the Middle East conflict led to a broad decline across all sectors. Sectoral indices reflected this downturn, with each registering losses over the month. However, on a calendar-year-to-date (CYTD) basis, the pharmaceutical sector stands out as a resilient performer, showing the strongest returns amidst market volatility. The downward trend wasn’t limited to India; global equity markets also experienced a similar slide, impacted by international uncertainties.
Author: Growthfiniti@admin
The Trump Presidency and its Impact on Global and Indian Markets
With Donald Trump confirmed as the new U.S. President and Republicans likely controlling both the Senate and House (a “Red Sweep”), markets are bracing for potential shifts in economic policy and investment dynamics. This development has fueled a global “risk-on” rally, where investors are optimistic and shifting capital into riskier assets like stocks, the U.S. dollar (USD), and cryptocurrencies. However, the fundamentals suggest that high volatility may continue, which could affect portfolios in both the short and long term.
Let’s explore how this new political landscape might shape the global market and what it means for Indian investors.
Table of Contents
A Global Market Rally – But With High Volatility
The Trump Effect
The “Trump trade” is back, with investors expecting policies that may benefit businesses, such as tax cuts and spending on infrastructure and defence. However, these expectations come with a catch. While markets are rallying now, global growth and inflation are likely to experience increased fluctuations. This higher structural volatility challenges traditional investment strategies like “buying the dip” (investing after a price drop) and timing market rallies. Instead, investors may need to take a more flexible, adaptive approach to navigate the ups and downs that lie ahead.
Interest Rates on the Rise
A “rising term premium” is a trend likely to persist under Trump’s economic policies. This means that bond yields are expected to climb, making borrowing more expensive and affecting the returns on fixed-income assets. Higher yields also raise the likelihood of “currency wars” — situations where countries might try to weaken their currencies to boost exports. These developments, if sustained, could redefine the risks for various asset classes over the coming years.
Currency Volatility
One early indicator of these shifts can be seen in currency markets. The U.S. dollar index (DXY) could rise to 110. Such moves would have significant ripple effects across economies, particularly emerging markets with weaker currencies.
India: Facing FX and Rates Market Turbulence
For India, the immediate effects of Trump’s presidency are likely to be felt in the FX (foreign exchange) and rates markets.
The Indian Rupee (INR)
The INR may weaken due to currency pressures. The INR’s natural weakening bias could create challenges for Indian investors, who may need to consider hedging strategies for international investments.
Bond and FX Volatility
The rise in bond yields and currency fluctuations could lead to increased volatility in the bond and FX markets, potentially putting pressure on the Reserve Bank of India (RBI) to prioritise financial stability over its usual focus on inflation management. This shift might limit the RBI’s ability to cut interest rates, potentially resulting in a shorter rate-cut cycle than anticipated.
The Market Impact of Trump’s Economic Policies
Trump’s economic strategy involves tax cuts, higher spending on infrastructure and defence, and significant changes to trade policy. Here’s how these factors are expected to play out:
- Fiscal Expansion
Trump’s proposed extension of the 2017 tax cuts, set to expire in 2025, would add around $4.6 trillion to the U.S. deficit over the next decade, potentially rising to $7.5 trillion with expanded policies. This fiscal stimulus could lead to higher interest rates and influence bond markets worldwide. - Tariff-Driven Trade Policies
Trump’s stance on trade includes tariffs such as a proposed 60% tax on Chinese imports and 100% on electric vehicles from Mexico. These policies could benefit certain U.S. industries but also increase costs for U.S. consumers and businesses. Tariffs of this scale would heighten trade tensions, disrupt global supply chains, and increase operational costs for companies with international exposure. - Implications for the Dollar
While Trump has previously favoured a weaker dollar to benefit U.S. exporters, the fiscal stimulus under his administration might actually strengthen the USD, amplifying volatility. This trend may exert pressure on Asian emerging market currencies, including the INR, potentially dragging down purchasing power and investment returns in those regions.
What This Means for Indian Investors
India’s lower reliance on foreign portfolio investors (FPIs) for sovereign debt (around 3%) and its strong domestic demand could help it maintain a relatively lower bond risk premium than some other emerging markets. Indian equities may see temporary gains due to speculative moves by FPIs, but sustained growth in earnings and a solid fiscal position will be key to driving long-term gains.
How Growthfiniti Wealth Can Help You Navigate These Shifts
As volatility becomes the new normal, staying agile and informed is critical for high-net-worth individuals. At Growthfiniti Wealth, we specialise in crafting strategies that anticipate and adapt to market changes, allowing clients to seize opportunities even when market conditions are uncertain.
For investors navigating the impact of Trump’s presidency on global and Indian markets, we’re here to provide guidance that goes beyond the headlines. Get in touch with our team to learn how we can help fortify your portfolio against the evolving financial landscape and keep your wealth secure.
Investing beyond NIFTY50
Valuations remain elevated but are expected to normalize as earnings growth catches up. The market may not see the PE expansion witnessed earlier; rather, it could trade in a narrower PE range of 18x-22x, depending on how corporate earnings evolve.
Money Trends September 2024
Domestic equity markets started the month on weaker note amid weak global cues as sentiment was dampened following weak U.S. manufacturing data of Aug 2024, which reignited concerns over an economic slowdown in the world’s largest economy.
Federal Reserve 19/09/2024
The Federal Reserve has joined the easing cycle by reducing interest rates by 50 basis points (bps) to a range of 4.75%-5%. Only one committee member dissented, favouring a smaller 25bps cut. The Fed’s rate is now expected to fall to 4.4% by the end of the year, signalling an additional 50bps cut in 2024 and a further 100bps reduction in 2025. Headline inflation projections for 2024 and 2025 have been revised lower by 30bps and 20bps, respectively, while the 2024 growth forecast was reduced by 10bps to 2.1%, and the estimates for 2025 and 2026 were kept unchanged at 2%. These quicker rate cuts are expected to benefit both the economy and equities.
The accompanying statement reflected changes supporting this rate action. On inflation, the Fed noted that it has “gained greater confidence that inflation is moving sustainably toward 2%,” and that it now “judges the risks to its employment and inflation goals to be roughly balanced.” Additionally, the statement introduced new language, expressing a “strong commitment to supporting maximum employment.”
Key points from the press conference:
– Future decisions will be made on a meeting-by-meeting basis, relying on incoming data.
– The initial 50bps cut reflects confidence that inflation is trending toward 2%, though this does not suggest similarly aggressive rate actions will continue.
– The labour market will be closely monitored, as the current cut aims to maintain its strength.
– No recession indicators are evident at this time.
Changes in economic forecasts compared to June’s projections:
– GDP: Growth for 2024 was lowered to 2.1% (-10bps), with 2025 and 2026 growth unchanged at 2%, and 2027 growth projected at 2%.
– Unemployment rate: Revised higher to 4.4% (+40bps) in 2024, 4.4% (+20bps) in 2025, and 4.3% (+20bps) in 2026. The 2027 rate is projected at 4.2%.
– PCE inflation: Lowered to 2.3% (-30bps) for 2024, 2.1% (-20bps) for 2025, with the 2026 forecast unchanged at 2% and 2027 also at 2%.
– Core PCE inflation: Reduced to 2.6% (-20bps) for 2024, 2.2% (-10bps) for 2025, remaining at 2% for 2026 and 2027.
– Federal funds rate: Expected to decline to 4.4% (-70bps) in 2024, 3.4% (-70bps) in 2025, and 2.9% in both 2026 (-20bps) and 2027.
August 2024 CPI
In August 2024, India’s Consumer Price Index (CPI) inflation slightly increased to 3.65% year-over-year (YoY) from 3.60% YoY the previous month. Food inflation also rose, reaching 5.30% YoY in August 2024, up from 5.06% in the prior month.
Vegetables, with a CPI weight of 6.0%, continued to be the main contributor to inflation, followed by cereals (9.7%) and pulses (2.4%). In August, inflation for these items remained high, with vegetables at 10.7% YoY, cereals at 7.3% YoY, and pulses at 13.6% YoY. Overall, food inflation remained broad-based, with 40% of items in the food basket experiencing inflation rates above 6%.
Core inflation, excluding food and fuel, held steady at 3.44% YoY. However, core inflation and its refined measures, which further exclude valuables and transportation fuels, saw an increase in July due to a revision in mobile tariffs.
As of September 12, the monsoon has recorded 8% above-normal rainfall compared to the long-period average. The spatial distribution of rainfall has improved over the past month, with excess rainfall in Central and Southern India, normal levels in the North, and deficits in East and North-East India.
We expect inflation to average around 4.3-4.5% YoY for FY25. Food prices may continue to introduce volatility into headline inflation. The RBI’s Monetary Policy Committee might consider shifting the policy stance to ‘neutral’ in the October meeting, given the above-normal monsoon is likely to alleviate food inflation pressures.
Money Trends August 2024
Domestic equity markets started the month on weaker note on concerns over a potential economic slowdown in the U.S. because of lackluster economic indicators such as sluggish job growth, increased unemployment rates, and disappointing corporate profits. Losses were extended due to Yen carry trade issue following the Bank of Japan’s decision to raise its interest rate from 0.10% to 0.25%.
Q1FY25 GDP Data:
Key Highlights of Q1FY25 GDP Data:
- GVA Performance: Q1FY25 GVA exceeded expectations by 30bps, reaching 6.8% YoY, though GDP was slightly lower at 6.7%.
- Industrial Growth: Industrial sector growth improved to 7% YoY, with manufacturing showing a 7% increase. Electricity output advanced by 10%, supported by a favorable base, while mining also displayed solid growth at 7%. Agriculture growth was softer at 2%, aligning with expectations.
- Services Sector: Services growth remained robust at 8%, driven by Construction (11%), Public Administration & Defense (10%), Financing & Real Estate (7%), and Trade, Hotels, and Transportation (6%).
- Investment and Consumption: Despite the quarter’s elections, GFCF growth was steady at 7%, and private consumption (PFCE) growth rose to 7%, though government spending was weak.
- Trade: Exports increased by 9% YoY on a favorable base, while imports grew by 4%.
- Nominal GDP: Nominal GDP growth was at 10%, up from 8% a year ago.
Summary of Economic Trends:
Q1FY25 economic growth remained strong, despite a high base. The growth in GVA was driven by the manufacturing and services sectors, especially construction, while GDP was supported by a pick-up in private consumption and investments. Looking ahead, factors like an above-normal monsoon, higher agricultural output, continued private consumption growth, festival demand, and a focus on capital expenditure are expected to sustain economic activity. The GVA/GDP estimates for FY25-26 remain at 7-7.5%.
Detailed Breakdown:
- GVA: Q1FY25 GVA stood at 6.8% (PC/Consensus estimate: 6.5%/6.4%), compared to 6.3% in the previous quarter and 8% in Q1FY24.
- Industrial Sector: Industrial growth accelerated to 7%, up from 5% in Q1FY24, with manufacturing also growing by 7% compared to last year’s 5%. Electricity and utilities saw a robust 10% increase, compared to 3% the previous year, while mining growth was moderate at 7%.
- Services Sector: Services GVA grew by 8% compared to 10% in Q1FY24, with Construction leading at 11%, followed by Public Administration & Defense (10%), Financing & Real Estate (7%), and Trade, Hotels, Transport (6%).
- Agriculture: Agriculture GVA growth softened to 2%, compared to 4% the previous year.
GDP Performance:
- GDP Growth: Q1FY25 GDP grew by 6.7% YoY (PC/Consensus estimate: 7%/6.8%), compared to 7.8% in the previous quarter and 8% in Q1FY24.
- Investments: GFCF growth was resilient at 7.5%, slightly down from 8.5% last year, despite the general elections.
- Private Consumption: Private consumption (PFCE) grew by 7%, up from 6% in the same period last year, though there was a sequential dip of -2%, a much slower decline compared to the same period in the previous two years.
- Government Expenditure: Government spending remained similar to Q1FY24 levels.
- Trade: Exports increased by 9% YoY, benefiting from a favorable base, while imports grew by 4%. Sequentially, imports rose by 11% QoQ, while exports fell by -14%.
July CPI and June IIP 2024
Key Insights from July CPI and June IIP:
- Headline Inflation: The headline inflation rate dropped below the 4% target, primarily due to a favorable base effect. However, food prices remained a concern, with another significant increase in vegetable prices, as expected. The revision of mobile tariffs also contributed to higher services inflation. Despite the lower overall inflation, driven by the base effect, the RBI’s monetary policy stance is unlikely to be influenced, as inflationary pressures remain elevated.
- CPI Performance: The Consumer Price Index (CPI) eased more than expected to 3.5%, compared to 5.1% last month and 7.4% a year ago. On a sequential basis, inflation rose by 142 basis points (bps) compared to 133 bps last month, largely driven by food inflation, which increased by 247 bps compared to 269 bps last month. This was mainly due to a 14% month-over-month rise in vegetable prices for the second consecutive month.
- Core CPI: Core CPI increased to 3.3% from 3.1% in the previous two months, after a year of consistent decline. The sequential pace of core inflation rose to 56 bps from 11 bps last month.
- Price Increases: Prices rose across most categories except fuel, which saw a slight decline of -0.2%. Housing, clothing, and pan & tobacco prices increased by 0.5%, 0.2%, and 0.2%, respectively.
- Services Inflation: The pace of services inflation accelerated to 0.8% month-over-month, up from 0.3% in the previous two months. The most significant price increase was in transport and communication (1.8%), driven by a mobile tariff hike. Education prices continued to rise by 0.9%, while medical care, personal care, and household requisites saw modest increases of 0.2%-0.3%.
- IIP Growth: Industrial production growth slowed to 4% year-over-year, down from 6% last month and 4% in June 2023. Mining, manufacturing, and electricity sectors registered year-over-year growth of 10%, 3%, and 9%, respectively. Of the 23 industries, 14 saw year-over-year growth, with electrical equipment, computers & electronics, and other transport equipment being the major contributors to the IIP.
- Sectoral Performance: Among use-based segments, consumer durables (9%) led the growth, followed by primary goods (6%), infrastructure goods (4%), intermediate goods (3%), and capital goods (2%). Consumer non-durables contracted by -1%. Sector-wise, 14 out of 23 sectors showed year-over-year growth, with notable increases in electrical equipment (28%), computers & electronics (16%), and other transport equipment (9%). Declines were seen in tobacco products (-11%), pharmaceuticals (-3%), paper products (-2%), textiles (-2%), and beverages (-1%).
Summary:
- CPI: Inflation eased to 3.5% in July, primarily due to a favourable base, but sequentially, it rose by 142 bps. Core CPI also saw an uptick, driven by food and services inflation.
- IIP: Industrial production growth slowed to 4% year-over-year, with mixed performance across sectors.
Money Trends July 2024
Domestic equity markets rose during the month amid reinstated expectations that the U.S. Federal Reserve would start interest rate cuts in Sep 2024 following the dovish commentary from the U.S. Federal Reserve Chairperson.