Strategy: When everything is up in the air by Kotak Institutional Equities
When everything is up in the air
The sharp rally in Indian equities over the past few weeks belies the extant realities of (1) chaotic global trade, (2) limited progress in India-US trade negotiations, (3) weakening earnings trajectory and (4) lofty valuations. Notwithstanding the decent improvement in India’s macro-outlook, the Indian market appears to be driven by narratives again, despite their poor record.
Trade situation is still in the air
Global equity markets have seen a sharp rally in the past few weeks, after the US paused high reciprocal tariffs on April 9 (see Exhibit 1). Markets have celebrated incremental ‘positive’ news, even as (1) US tariffs on China are quite high (see Exhibit 2), (2) the US has imposed 10% tariffs on the UK, despite its trade surplus with the UK (see Exhibit 3) and (3) reciprocal tariffs have only been suspended until July 9. Indian markets have also priced in positives from ongoing talks with the US, despite (1) trade talks being extended, (2) US demands of zero tariffs on all US exports (including agri-goods) and (3) India running a decent trade surplus with the US (see Exhibits 4-5).
Good macro, mediocre micro for now but one or both could go either way
India’s macroeconomic outlook has improved over the past two months on (1) benign CPI inflation, (2) better BOP outlook on weak crude prices and positive capital flows and (3) likely higher savings of the domestic economy from falling crude prices and an appreciating INR (see Exhibits 6-9). Meanwhile, many highfrequency indicators have seen steady weakness in recent months (see Exhibit 10). Earnings outlook has deteriorated across market caps and sectors, as seen in the steady cuts in consensus earnings (see Exhibits 11-15).
4QFY25 earnings season a bit light
4QFY25 earnings season has been broadly muted, with (1) Nifty-50 net profits growing 7.5% yoy, (2) KIE coverage net profits growing 10.8% yoy but (3) the bulk of the outperformance being driven by banks and downstream oil marketing companies (see Exhibits 16-17). Most large sectors saw a varying mix of growth and profitability challenges coupled with a dim outlook, with (1) consumer companies reporting weak volume growth, margin headwinds and muted demand commentary, (2) investment companies reporting margin challenges, (3) banks reporting weak credit growth and (4) IT services companies indicating weak demand (see Exhibits 18-24).
Valuations are high, sentiment is on a high
The recent rally in Indian markets has resulted in (1) large-caps trading at or above full valuations, (2) mid-and-small caps trading at lofty valuations and (3) ‘narrative’ stocks trading at frothy valuations (see Exhibits 25-34). The market is again in the grips of irrational exuberance with the market quick to discount any half-baked narrative (defense being the latest one). The market’s recurring tendency to buy into narratives is astonishing given the history of narratives. Many had emerged and collapsed in the past 2-3 years.
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