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Below the Quote on Global Markets on Edge - Note By Jitendra Gohil, Chief Investment Strategist, Kotak Alternate Asset Managers

A wave of anxiety has gripped global equity markets as US economic resilience and Trump’s tariff policies spark inflation concerns. The US Dollar Index (DXY) has surged by 9.1% since September 2024, driven by a resilient US economy and better-than-expected unemployment figures and job growth. Donald Trump's foreign policies and expectations of higher inflation have heightened concerns about rising bond yields in developed countries, with bond yields in the US, UK, Germany, and France increasing significantly. In contrast, India's bond yields have remained stable due to solid fundamentals, while China faces deflationary pressures with its 10-year bond yield at an all-time low.

The market's behavior appears to be an overreaction fueled by fears of the US market's strength amid global inflationary pressures and the potential impact of Trump's trade policies. This sentiment may persist until there is clarity on his policies. The US market does not operate in isolation, and given the unsustainable debt levels in the USA, it remains to be seen how the economy will be managed once Donald Trump takes office on January 20, 2024.

Given this backdrop, we anticipate further selling pressure in Emerging Markets, including India, as leverage trades unwind and rising bond yields lead to corrections in equity valuations. For equity markets to stabilize, it is crucial that bond yields and the US dollar stabilize. In the near term, global uncertainty may continue to temper risk appetite, in our view.

While India’s economic growth saw slowdown in H1, the macroeconomic fundamentals are still relatively stable. We continue to believe that growth could accelerate in the coming quarters, with economic indicators suggesting that the growth momentum has started to pick up again. The recent IIP data showed good acceleration with 5.2% growth, the highest in the last six months. Agriculture output is expected to witness significant growth this year, which will not only boost the rural economy but also help ease inflationary pressures. Headline inflation has eased to a four-month low of 5.22% and could decline further with a drop in food inflation.

Regarding corporate earnings, we expect some downgrades in FY25 before earnings stabilize and accelerate again in FY26.

In the near-term caution is warranted given global uncertainties, a stronger US Dollar, and rising bond yields. However, we advise investors to stay invested and prefer large caps over mid and small caps. Once Donald Trump assumes the presidency on January 20th, some clarity may emerge. This, along with the Union budget in India on February 1st and the RBI policy outcome on February 7th, should provide more clarity on growth fundamentals.

While the odds of a February rate cut in India have diminished, it is not entirely off the table. Given the better-than-expected fiscal consolidation, we believe the economy needs monetary policy support.

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