Earlier this week, Prime Minister Narendra Modi claimed that the incumbent ruling dispensation (NDA) shall return to power in 100 days with a much larger majority. The popular political debate is now getting narrowed to the question “whether NDA will return to power with 300/545 seats or 400/545 seats”.
On the other side of the globe, the political debate in the US is also fast reaching the point where the most relevant question would be “Who will Donald trump defeat in the November presidential elections?”
The ever-forward-looking financial markets are not oblivious to these more likely political outcomes. It is therefore safe to assume that the current prices have factored in the election victories of Modi and Trump. Thus, from a political viewpoint, one should not anticipate a significant upside to the financial markets. An unexpected election outcome may though result in a material downside.
In the latest episode of Greed & Fear, Christopher Wood (of Jefferies), said about the US markets, “The stock market is priced for an idealized soft landing while the money markets are priced for a degree of monetary easing which only seems likely in the event of a recession. The fed fund futures are now discounting 144bps of rate cuts this year. On the US stock market, the Nasdaq 100 is now trading at 24.4x one-year forward earnings and the Russell 2000 is trading at 22.6x, compared with 19.6x for the S&P500, according to Bloomberg.”
The summer in the US is therefore going to be full of discontent. A soft landing (further earnings downgrades, slower consumption, and rising financial stress) may limit the upside in stocks while the Fed pushing the rate cut beyond May’24 may cause restlessness in the bond markets.
Back in India, the chances of any further re-rating of equities are getting slim.
· Private consumption slowdown is now well accepted. The interim budget has made it clear that even public consumption is not likely to improve anytime soon.
· The budgetary allocation for capital expenditure in the sunrise sectors Defense, Railways, Utilities, etc. has seen meager growth in FY25BE. The valuations of the stocks of these sectors may not see any further PER re-rating. The returns from here logically should be similar to the earnings growth in these businesses. Any disappointment in execution may however see a sharp sell-off.
· Decelerating global growth shall keep export growth under check. The downward shift in growth trajectories of the US and China could also spill over to India through several transmission channels, such as trade in goods and services, commodity prices, and investment.
· RBI has also made it clear that going forward it is not an all-blue-sky scenario for the Indian economy this summer. The risks to inflation and growth are at best balanced. The bond markets may not be fully pricing in the downside risks.
I do not want to sound like a party pooper. Nonetheless, I am happy to use this spring for repairing my roof, servicing my air-conditioner, and oiling my vehicle. Just in case, there is a cloud burst, sudden heat wave, or flood warnings needing immediate re-location.
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