Following the reversal of reciprocal tariff measures, the domestic equity market staged a sharp recovery, gaining 14% within just two weeks. Amid the global sell-off, India demonstrated relative resilience, making the rebound more robust and presenting an opportunity for investors to pare down their positions as global & domestic market continue to be cautious.
Currently, the market appears to be in overbought territory, prompting profit-taking as investor sentiment begins to wane. Global markets remain unsettled, reacting unpredictably to President Trump’s ambiguous and often contentious remarks. The trade war between the US and China has got irrational, which is expected to slow down the world economy’s growth. Meanwhile, hopes for a resolution to the Russia-Ukraine conflict remain distant, and the relationship between Trump and Ukrainian President Zelensky continues to deteriorate.
Domestically recent developments have offered little support. Financially, Q4 is not providing any good updates, with deep weakness in IT results under the threat of tariffs and high FED rates. In contrast, the financial sector has shown relatively stronger performance. Although FIIs have recently resumed modest daily inflows into Indian markets, their continuity remains uncertain due to escalating border tensions between India and Pakistan following the Pahalgam attack. India’s recent actions suggest potential retaliatory measures ahead, contributing to a sense of caution among foreign investors.
Both the global & domestic status indicate the high possibility of a correction in the short-term, but these are the reasons for the dips that should be positive for long-term investors:
1. The recent shift in tone from President Trump suggests that the most intense phase of the tariff war may be behind us. Falling Trump ratings, rising differences within the Republic Party, the subdued performance of the US stock market, the selling of US bonds and the deep fall in dollar prices have pressurised Trump to slow down or pause his tantrum.
2. At the same time, Trump’s rhetoric appears to have been strategic in creating a sense of urgency among key nations such as Japan, South Korea, and India to accelerate trade negotiations. But chaos between the largest trading partners China has deteriorated. However, statements from Trump, the US Treasury Head and the media indicate that the trade war between both partners can reduce in the future to cut the heavy economic impact.
3. Both points may indicate that the slowdown in world economy growth lately pondered by the economist may not be as strived for. This is expected to reduce the effect on India’s which is standing with the advantage of a shift in business with the rise of GCC.
4. Vance’s visit to India is an indication of the importance of the relationship with India, both trade-wise and geopolitically. It is expected to be followed by Trump visiting India later this year, revealing future deals.
5. India is already in talks with the US to finalise the FTA, and similarly, the US with many other nations to settle tariffs nation-wise, which is expected to reduce or cap future trade chaos. India will benefit from attaining a better & fast deal and also being placed on the low tariff list.
6. The external factors for India have become appealing as crude prices and commodity prices are becoming cheaper, oil is at 3.5yrs lows. This is expected to ease fiscal costs (beneficiary for INR) and input costs for corporate, which is indicative of a rise in EBITDA margin in FY26 and FY27.
7. The rate cut and liquidity-driven measures done by the RBI are expected to boost India’s economy and financial market. Banks are the best performers in the market, which is expected to hold well during the years, led by a reduction in cost and treasury gains, holds the maximum weightage in the market.
8. During the consolidation of the India stocks market since Sept 2024, the valuation of the stock market has become appealing for long-term investors, especially large caps. Large caps are performing better, which is expected to go well, led by the resilience of the Indian economy & stock market, as revealed during the year.
9. For Mid & Small caps the prices have become lucrative for the long-term investors, but valuation continue to trade high due to muted earnings growth in FY25. The sentiment towards the category has fallen and is expected to stay weak as liquidity is beaten. This trend can reverse during the year as external risks subside, strong undercurrents of the domestic economy & reduction in inflation bringing back earnings growth and as retail liquidity rebounds. A good time for persistent investors to dip into it by accumulation strategy.
10. India EPS is forecast to grow by 10- 12% in FY26. This is after the rapid slowdown in FY25 growth to 5-6% due to the rise in inflation, fall in local demand due to disruption in government spending and the rural market thus impacting EBITDA. These issues are expected to reverse in FY26. Although the recent imposition of tariffs has not yet significantly affected Indian exports, the global economic slowdown remains a concern—albeit with signs that the associated risks are beginning to subside.
