Recent high-frequency indicators present a detailed view of the economy, showing an overall improvement in activity compared to the previous quarter. Rural demand has shown more significant signs of recovery, driven by increased sales of two-wheelers and tractors, which are essential indicators of rural consumption and agricultural sentiment. In contrast, with limited discretionary spending, urban consumption has remained relatively subdued.
On the supply side, the manufacturing sector has demonstrated mixed performance. While the manufacturing Purchasing Managers’ Index (PMI) improved compared to the previous quarter, industrial production growth has moderated. However, construction activity has gained momentum, with steady improvement in related indicators over the past five months.
With the backdrop of a recovering economy and an early-stage corporate earnings cycle, the Indian market is trading at roughly 20x one year forward, which is below the 5-year mean. This demonstrates no froth in valuations, setting the stage for an upside to Indian markets, barring significant geopolitical tensions.
Overall, the current macro environment, supported by capital expenditures and consumption, limits downside risks to earnings, reinforcing an overweight stance on equities over bonds. Investors should view market dips as opportunities to align with long-term asset allocation goals, preferring large-cap stocks for favorable valuations and a greater margin of safety.
Consensus estimates for FY25 and FY26 have been revised downward by about 2%, creating a low bar favoring a favorable beat-to-miss ratio in the NIFTY500. While sectors like IT, FMCG, and financial services have seen the most misses, aggregate profit after tax (PAT) growth has returned to positive territory with a 4% increase. The NIFTYNEXT50, however, has shown a stronger year-on-year growth of 23% for Q4 FY25. Company guidance during this earnings season has led to slightly higher earnings growth expectations for FY26-27, especially in cyclical sectors like cement, energy, and real estate. Conversely, large-cap IT and FMCG EPS growth will likely be weaker than consensus expectations.
In light of the current war-like situation on the India-Pakistan border, we highlight that if Kargil is a reference point, continued volatile news flow of claims from both countries will keep the market volatile. During the Kargil skirmish, India’s markets fell 7 to 9% during the War. On evidence that India was winning and the War was ending, markets were up 15 to 18% in the following month.
With that background, defense, hospital, and financial services companies present short-term opportunities while being fundamentally strong sectors.
The economy is on track for the growth that the RBI and the Indian government agencies have targeted.
The services sector grew strongly in the fourth quarter of FY25, supported by substantial increases in GST collections, e-way bills, toll receipts, and port cargo volumes. Robust domestic demand, proactive monetary and fiscal policies, and a stable external environment foster a favorable climate for sustained investment flows.
With a stable Indian economy and the uncertainty of the India-Pakistan conflict, the RBI is likely to stay on course with two additional rate cuts of 50 basis points for the remainder of 2025 unless there is a marked rise in border conflict.
The author, Chakri Lokapriya, is the CIO Equities of LGT Wealth India.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.
