Research

Markets rebound despite tariff overhang - Vinay Paharia, CIO, PGIM India Mutual Fund

Posted On : 2025-04-16 17:57:43( TIMEZONE : IST )

After five consecutive monthly declines, Nifty surged 6.3% in March. Mid-cap. and small-cap indices also joined the rally and were up 7.8% and 9.5%. Almost all sectors ended in green except IT, which declined 1.5%. Power, PSU, capital goods, oil & gas and metals sectors were up 10-15%. Lingering concerns over the potential impact of US President Donald Trump's tariff policies and their subsequent economic consequences continued to weigh on investor sentiment. However, the sentiment improved after the Federal Reserve indicated two rate cuts this year, and improvement in foreign inflows. Other key developments during the month were: (1) OPEC+ unveiled plans to gradually unwind its voluntary production cuts and (2) the FOMC kept policy rates unchanged at 4.25-4.5% while retaining the projection of two rate cuts in CY2025.

In FY25, Nifty 50, Nifty Mid Cap 150 and Nifty Small cap 250 delivered low single-digit returns of 3-6%, however, the correction over the last 6 months has been steeper in mid and small cap indices at ~15% vs Nifty 50 at 7%. While IT, Banks and Pharma have been key outperformers over FY25 with returns of 5-10%, Auto, FMCG, Realty and Energy underperformed, declining by 5-15%. The sectoral performance over the last 6 months is on similar lines to FY25 yearly performance.

FPIs bought US$737 Mn of Indian equities in the secondary market, whereas DIIs bought US$975 Mn. The rupee rebounded by 2.2% in March after facing pressure in February and is down 2.5% YoY. India 10Y yields were down 20bps MoM at 6.58%.

On the economy front, February CPI inflation continued to decelerate from 4.3% to 3.6% in January. WPI inflation for February was at 2.4% compared to 2.3% in December. IIP growth in January improved to 5% from 3.5% in December. After declining in Dec'24, industrial production growth rebounded to a five-month high of 5% in Jan'24. However, for the first 11 months of the fiscal year, growth averaged 4.1%, lower than the 5.9% in the same period last year. On the production side, mining and manufacturing growth accelerated, while electricity output moderated. Capital and infrastructure goods rebounded after a sluggish start to FY25, likely due to improving government capital expenditure. Meanwhile, durable goods growth has slowed since peaking in Nov'24 during the festival season.

Non-food credit growth (including the impact of the HDFC merger) continues to remain tepid at 11% YoY vs 11.4%/11% in Jan 25/Dec 24. Retail credit and loans to NBFCs continues to moderate with growth at 12% and 8% respectively. Unsecured retail loans growth dipped below secured retail loan growth at 9% vs 13% respectively. Industry credit continued to be muted at 7% YoY growth vs 8% YoY growth in February.

Outlook

We are seeing a lot of turmoil and volatility on multiple global fronts. Trade relations and tariff rates are being redrawn, supply chain and sourcing locations are being reconsidered and there is a likelihood of deglobalization. The above may not be very conducive to the economies and be inflationary in nature for certain parts of the world in general if implemented in earnest.

In such a scenario, we reckon it is better to be more focused in domestic businesses rather than export-focused ones in terms of portfolio construction. Domestic themes such as consumption, financials, healthcare (ex-exports) offer a more structural and long-term growth visibility vs sectors and stocks which are global events-dependent and/or policy-dependent. The India story of double-digit nominal GDP growth and India Inc. profitability is still very much plausible (though there has been some near-term slowdown) for the longer term and it is better to play this story through domestic structural themes vs cyclical themes.

We expect polarized performance from the markets. We expect growth and quality buckets to outperform while the low growth/quality bucket to underperform and give away the excesses which were built in FY24.