- Markets seem to continue a gradual upward trajectory, though a bumpy one
- Earnings growth have recovered from the 5-6% levels that we witnessed earlier to around 10% levels.
- Uncertainties around tariffs continue to hover.
Markets have remained in a volatile phase throughout 2025, but we have witnessed a turnaround as we entered the month of November despite them being shy of earlier peaks. Decisive policy support through GST and Income tax cuts, frontloaded policy rate easing by the RBI and benign liquidity conditions is likely to trigger a consumption led growth cycle in H2 FY2026. The markets witnessed a massive
correction during the period between September 2024 till February 2025, owing to multiple factors including FED’s delayed rate cut, FII’s pulling out their investments and valuations correcting in a big way. However, this was followed by a phase where we witnessed increased liquidity and taxation reprime led by positive policy changes, thus putting the country back on a growth path. On a trailing and a forward basis, both the NIFTY and the NIFTY 500 continue to remain overvalued both on a long term as well as a trailing average. Having said that valuations have remained slightly higher as compared to the fair value. Earnings data has started to improve gradually also owing to the GST reforms undertaken by the government.
FII’s on the other hand have remained sellers overall, possibly considering the current tariff situation and the ongoing uncertainties around it. Within the NIFTY 500, midcap stocks witnessed the most significant change in performance, while small caps came under significant pressure as their performance moderated. If earnings improve, which they are likely to, considering the impetus that the government is bringing in, markets are likely to continue to drive momentum forward. The chart on the left looks at the performance of multiple indices across the past 5 years.
On monetary policy, the RBI frontloaded stimulus with 100bps Repo rate cuts (5.5% by June 2025) and 100 bps CRR cuts (November 2025). Banking system liquidity moved into surplus from deficit at the start of year, with other liquidity injections (OMOs, FX Swaps). This has ensured better transmission of lower rates. On Fiscal policy, we have seen significant tax cuts, starting with income tax cuts of ~INR 1 trillion in February Union budget, followed by the recent GST rate cuts of ~INR 2 trillion. The GST rate cuts, supports growth and structurally lowers inflation trajectory by ~50bps.
Global markets on the other hand continues to remain overvalued with AI stocks driving the momentum forward. The US market is increasingly concentrated in a few stocks, with eight of the 10 largest stocks by market capitalization being directly tied to the artificial intelligence buildout boom. Markets have largely priced in a slowdown in the US. Europe on the other hand is likely to fare slightly better. In China, expectations for additional policy stimulus have been lowered and housing market weakness has reemerged. GDP growth is forecast to slow in the coming months, standing at 4.8% for the full year.
Overall, we expect equities to outperform traditional asset classes and RBI to support lower bond yields in India. Multi-asset strategies with dynamically managed exposures to major asset classes (i.e. equity, debt, and commodities) is likely to support portfolio diversification and improve risk-adjusted returns.
