Markets today: After a subdued start into 2025, D-street investors are finding little hope ahead as sentiments uplifting the market mood remain limited
Trump Presidency: Two weeks into the new year and nothing seems to cheer the market. Benchmark indices— Sensex and Nifty—have already been on a downtrend for the past 6 months, plunging by over 5%. Earnings season, as the street had expected, is turning out to be rough for India Inc.
On the macro front, the subdued GDP figure of 5.4%, forex kitty declining below $640 billion and of course, the trajectory of Rupee which touched an all-time-low of Rs 86.6 against the dollar, are all sending the investor sentiment on a sharp downtrend.
What’s adding even more pressure is the global mood pivoting to a more Trump-inclined policy picture.
With investors rushing behind Trump trade, every asset class linked to the MAGA (Make America Great Again) theme is seeing a strong uptrend. Just earlier this week, US bond yields hit a record high of 4.79%, with analysts already expecting the yields to surpass the 5% mark. Bitcoin's rally is quite evident and crude oil prices, which dipped below $65 last year, are regaining momentum. Most importantly, the dollar index surpassed the 109 mark last week.
All these factors combined are leaving little optimism for the Dalal Street. And the list of factors doesn't end here. In short, things couldn't have got worse for Indian markets.
After Trump’s victory, many had already anticipated that the Federal Reserve would slow down the pace of rate cuts. However, some now believe there’s a strong possibility that the Fed could shift back to raising rates instead.
This is largely owing to better-than-anticipated US jobs data, which added another layer of optimism to investor's euphoria on Wall Street.
Goldman Sachs analysts have already reduced their forecast for rate cuts this year. But for the D-street, a major shocker came after Bank of America (BofA) analysts hinted at a prospective rate hike.
"We think the cutting cycle is over....Our base case has the Fed on an extended hold. But we think the risks for the next move are skewed toward a hike," BofA analysts reportedly stated in a note.
This could impact domestic markets, as benchmark indices had already priced in a robust rate hike cycle during the latter half of last year.
A positive factor could be that overvaluation worries might settle down as the market gets a reality check. But again, for investors, it's the momentum that keeps the D-street optimistic.
"The slowdown in economic growth momentum and corporate earnings is a negative as expectations remain elevated. Therefore, we think the valuation multiples are likely to settle lower compared to the multiples prevailing in the recent past. Across most sectors, the valuations are higher than pre-pandemic levels, with the exceptions of financials, oil and gas and FMCG," Nomura stated in its report.
While the overall outlook appears dim, analysts suggest that the rise in certain US assets, like bond yields, might be an over-reaction. A similar rally was witnessed during Trump 1.0, however the same eventually started declining.
Trump euphoria could recede going forward as it did in CY17, and given the US Fed’s comments on significant progress made on inflation front, it is likely that the recent flare up in bond yields may have been an over-reaction, ICICI Securities stated in its report.
Having said that, ‘higher for longer’ interest rate environment looks like the base case although further flare up in bond yields appear unlikely, as pointed out by the brokerage firm.