Do it yourself

The markets began to take cognizance of the broader developments and oscillated wildly between the extremes of greed and fear during the year. However, thankfully, markets managed to close the year on a rather satisfactory note. Most asset classes – equity, bonds, precious metals, base metals and real estate yielded decent returns for the year. Moreover, as we begin the new financial year (FY26), some of the key concerns, e.g., wider trade conflicts, geopolitical escalations, and fiscal implosions have peaked and showing some early signs of easing.

In India, the economic growth returned to the normal pre-Covid trajectory, as the base effect of FY20 and FY21 low growth tapered off, and external challenges mounted. Equity markets settled close to their long-term average valuations, after witnessing one round each of euphoria and despondency. Bond markets and INR have also managed to end the year on a rather optimistic note.

The following are some of the highlights of the performance during FY25.

Equity Markets

The Indian equity market managed to end the year in positive territory, despite showing negative in six out of twelve months. Indian equities underperformed the global peers. The benchmark Nifty yielded a return of ~5% (3% in USD terms), which was in line with the US markets (S&P500 +8%), and Europe (Stoxx600 +5%, DAX +21%) but much lower than China (Hang Seng +38%, Shanghai Composite +9%). Asian markets, ex China, were mostly negative, with Japan (Nikkei225 -10%), Indonesia (IDX-10%), Korea (KOSPI -10%) and Singapore (SET -15%) ending the year with decent cuts. The valuation premium of Indian markets to the other emerging markets therefore remained elevated.

Banks saved the day for Indian benchmark indices

The benchmark Nifty (+5.3%) performed in line with broader markets (NSE500 +5.4%, Smallcap 100 +5.4%); though midcap stock did somewhat better (Midcap100 +7.5%). The gains in benchmark indices were mostly led by banks (Nifty Bank +9.3%). Overall market cap of NSE was higher by 6.9%, explained by many new listings and outperformance of midcap stocks.

Sector-wise, Financials, Services, Private Banks, Pharma and Metals were top outperformers. Media, IT Services, PSU Banks, Realty, FMCG, Auto, Infra and Commodities were notable underperformers. Micro-sector-wise, Ship builders and EMS were outstanding. Renewable energy and real estate builders were notable losers.

2HFY25 witnessed 5/6 negative months

The benchmark Nifty50 yielded negative month-on-month (MoM) returns for five out of six months in FY25. The second half of the year was worst with five out of six months resulting in negative MoM return. However, the market breadth was negative in nine out of twelve months implying much higher volatility in the broader markets.

Institutional flows positive

Over institutional flows were materially positive for FY25. Net domestic and foreign flows in the secondary equity market amounted to Rs3591bn. Foreign Portfolio Investors (FPIs) were however net sellers of Rs2480bn in the secondary market, while domestic institutions pumped in a record Rs6071bn. FPIs were net sellers in eight out of the twelve months. The nifty-institutional flow correlation (73%) was decent in FY25.

Debt and Currency Markets

Indian debt and currency markets were volatile in tandem with the global trend. However, both bonds and INR managed to close the year on a buoyant note.

RBI cut the policy rates by 25bps and Cash Reserve Ratio for commercial banks by 50bps. The benchmark 10-year treasury bond yields eased to 6.58% from 7.11% a year earlier. USDINR weakened 2.6% to 85.59 from 83.35 a year earlier. Lending and term deposit rates were higher by up to 10-20bps. The yield curve shifted lower and flattened completely.

The RBI changed its policy stance to “neutral” from “withdrawal of accommodation” in FY24. The liquidity position however continued to remain tight, with banking system liquidity remaining in deficit for most part of the 2HFY25. The credit growth outstripped the deposit growth. Overnight and call money rates cooled 25bps in 4QFY25, due to aggressive open market operations carried out by the RBI.

Economic conditions

Overall FY25E GDP growth slowed down to ~6.2% as the effects of the low base of FY21 and FY22 tapered off and fiscal correction progressed further. The consensus estimates for FY26E GDP growth is slightly better at ~6.5%. Nominal GDP growth for FY25E has been materially lower at ~9.1%, and is expected to pick up to ~10.5% in FY26E.

·         CPI Inflation mostly remained within the RBI’s tolerance band of 4-6% (except for a short spike in October 2024). Core inflation eased below 4% in August and then February 2024.

·         Real rates have mostly remained in positive territory during FY24.

·         Fiscal deficit remained high despite moderation over the past few years.

·         The private sector investments failed to gather the desired pace, despite several government incentives. The government capex also slowed down in FY25. 9MFY25 investment to GDP ratio dropped to 32.6%. Private consumption recovered in FY25E from the sharp dip in FY24.

·         External conditions worsened during FY25. Merchandise trade balance deteriorated to USD292bn. Exports were lower yoy, while imports were higher by 6% yoy. External debt was higher by 10%. Net FDI flows continued to slow for the third consecutive year.

Commodities

FY25 was a mixed year for commodities. Precious metals (Gold +40%, Silver 39%) and Industrial metals (Zinc +17%, Copper +10%) recorded good gains, while energy (Brent Crude -17%, Coal -20%) and agri commodities (Wheat -16%, Soy -14%) ended the year with strong losses.

Crypto shine

Cryptocurrencies further strengthened their position with material rise in trading volumes and market capitalization. Bitcoin ended the year FY25 with a strong 21% yoy gain. More jurisdiction accepted cryptocurrencies as a valid medium of exchange, financial asset and/or tradeable asset.

The "Reset" button pressed by the crisis resulted in widening of socio-economic divide across the world. The geopolitical tensions have intensified materially with rise in nationalism, protectionism and parochialism. This has not adversely impacted global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread rise in human suffering.

The COVID-19 pandemic further accelerated the "Reset" process, paving the way for the emergence of a new global order.

To put things in a right perspective, it is pertinent to note the changes in world order that have taken place since the advent of the 20th century.

In 1917, the Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of the USSR. In the following decades, many smaller independent European states became subservient to a mighty Russian socialist army, and together formed one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, USA decided to shed its long-held policy of isolationism, and joined the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, the USA evolved into a formidable military and economic power that led the NATO allies to become the second pole in the emerging bi-polar world.

It took three decades for the new order to consolidate. The imperialist global order that existed in preceding centuries began to dismantle. Many colonies of European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantled in the following three decades.

The new order was characterized by the UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), WEF, et. al. The globalization that was a norm prior to the first War was completely overpowered by the forces of nationalism and protectionism. This world order lasted till the German Wall fell and the USSR disintegrated in early 1990s; unleashing a new wave of globalization. In this world order, ‘market’ and ‘multilateralism’ was the dominant theme.

For two decades, since early 1990s, the global narrative was driven by global trade (WTO), Internet, digitalization, dematerialization, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control, until the global financial crisis pressed the reset button and Covid-19 pandemic added further impetus to the process and brough us on the threshold of a yet new global order.

The imperatives of the new world include—

·         Necessity to exit the accommodative monetary and fiscal policies originally adopted to mitigate the impact of GFC, which have become completely unsustainable after further loosening to mitigate the impact of Covid-19 pandemic.

·         Need to find an alternative to the USD, which continues to be the only global currency despite material weakness in the underlying fundamentals.

·         An urgent need to correct the imbalances that have creeped into global trade in the past three decades, due to aggressive growth agenda pursued by China & OPEC, technology developments in the US, persistent low yields in EU and Japan, and economic sanction on Russia, etc.

·         Weakening of old trade and geopolitical blocks weakening and emergence of new trade and geopolitical alliances, especially Russia, China and Iran nexus.

·         China is accelerating the drive to assume global leadership through mega initiatives like One Belt One Road (OBOR) and China Pakistan Economic Corridor (CPEC) and enlarging BRICS.

·         Weakening of the European Union due to the exit of the UK.

·         The US withdrawing from conflict zones like Afghanistan, Iraq, Libya refusing to engage in Syria, and ignoring genocide in Palestine, signaling a paradigm shift in its policy towards globalization and, free trade.

·         Worsening of the refugee crisis in the western Europe.

·         India’s effort to emerge as an alternative manufacturing hub to China, for the developed countries seeking to derisk their supply chains.

·         Growing irrelevance of the multilateral institutions like the UN, OECD, IMF etc.

It may be little early to speculate on the likely contours of the emerging new world order. However, I do believe that the new world may not be excessively localized, nationalist and/or protectionist. Nonetheless, it is entirely possible that several new trade and geopolitical blocks get form, and define the contours of the new world order.

….more on this tomorrow.

Also read

View from the Mars

View from the Mars - 2

Trade war cannot quick-fix

The master failing the first test

“Make America Great Again” (MAGA), campaign of President Trump has been one of the most successful political campaigns of recent times. The campaign won Mr. Trump and his Republican Party (GoP), a clear control of the white house, the Senate and the Congress.

From the campaign material available publicly, it is not clear what is the reference point for President Trump’s MAGA pledge. The campaign did not seem to have specified when did the greatness of the US begin to diminish and how much of the global stature, it supposedly enjoyed at some point in history, has been lost. For the lack of adequate information, it is safe to assume that the campaign of Mr. Trump, referred to the term of his predecessor, Joe Biden (2021-2025), as period of decline of America, and intends to revert to the status quo ante as on 19^th January 2021, when he vacated the White house after a four-year stay, and carry forward the unfinished agenda from his first presidential term.

A review of Agenda:47 (Trump’s campaign for the election of 47^th president of the United States), highlights that MAGA plan of Mr. Trump involves the following five key agenda points:

(i)    Reverting to pre-WW1 policy of isolationism (no interference in the affairs of the foreign countries where the US interests are not directly affected), strengthening the military, building a missile defense shield for the US, de-pledging from the NATO and UN, etc.;

(ii)   Assuming full control of government by eliminating agencies, departments, posts that can challenge the POTUS, using military for eliminating internal threats, and enhancing the powers of POTUS;

(iii)  Limiting immigration into the US to the qualified professionals who can contribute positively to the growth of US economy & society, and systematically expelling the foreign nationals who entered the US illegally or are burdening the US economy in any manner;

(iv)  Protecting and advancing traditional (Christian) values by curtailing liberal ideas of diversity, equity, inclusion, radical ideologies (e.g., gender affirmation), dealing strictly with the menace of drugs, etc., and a complete revamp of the education system, especially by dissipating the resources of private universities to fund a sate sponsored American Academy.

(v)   Strengthening the US economy, mainly through – (a) energy dominance by diverting focus from clean energy to the conventional energy and producing more for export; (b) balancing the US federal budget and bring interest rates down; (c) turning current account positive by onshoring manufacturing at a large scale and disincentivizing imports through higher tariffs; (d) making large investments in rebuilding infrastructure; (e) revamping the healthcare system; and (f) reducing tax rates to support household consumption and savings;

This agenda certainly resonated with average Americans households, especially conservative rural folks; financially stressed (and unemployable) urban households and white supremacist. They have been led to believe that immigrants have stolen their jobs; Canadian, Chinese, Mexicans and Indians are responsible for inflation & unemployment in the US; liberals have snatched their conventional parental rights; and the US has been unnecessarily and involuntarily dragged into wars in middle east, east Europe, Afghanistan, Vietnam etc., and withdrawing from these wars will save the US trillions of dollars; climate change is a hoax and they can get their tanks full by paying $6.49, if the US begins to drill gain.

I am not at all competent to comment on the US politics, US economy, and their geopolitical strategies. Nonetheless, I feel that the MAGA agenda of President Trump is nothing but an extension of the nationalist agenda that became popular post global financial crisis and gathered significant momentum post Covid-19 pandemic.

Several countries across the globe have seen ultra nationalist (mostly right wing) political parties gaining power; governments have preferred bilateral trade agreements over multilateral engagements; and major players of WWI and WWII are no longer shying away from expressing territorial and/or economic ambitions. Brexit is one of the examples of isolationist tendencies capturing politicians’ and the common public’s imagination. President Trump may just be following the trend.

In my view, ‘unsustainability’ might be at the core of this tendency. The profligate fiscal and monetary policies followed in the past two decades have definitely resulted in unsustainable consumption patterns and ecological climate damage. Given the massive demographic and economic inequalities, at global level and within countries, it may be almost impossible to find a universally acceptable solution for this unsustainable growth paradigm. Perhaps, therefore, societies are looking inward to set things back on track.

These days, conservation of resources, protection of territories, reversing demographic decline, reducing debt, promoting patriotism & nationalism are some of the popular themes with politicians. They are not hesitant in using religion, traditional & cultural values to emphasize on the necessity of authoritarianism (or a weaker democracy) in pursuing their agenda.

Historically, similar situations have invariably resulted in major conflicts and emergence of a new order. The moot point is whether we have reached the break point yet, or it may take a few more years (or even a couple of decades) of shenanigans to reach there.

Also read

View from the Mars

Trade war cannot quick-fix

The master failing the first test

·         In the post WW2 popular movies and novels, all mischievous and malevolent inhabitants of other planets and galaxies (‘Aliens’) attack only the United States of America (the US), especially the richest cities of New York and Los Angeles!

Whereas, there is evidence of just one attack (9/11 WTC attack in NY) on the US soil by a non-US citizen, in the post WW2 period.

·         Mostly, agents of the US secret services (or in few cases agents of the UK secret service) assume the responsibility of saving the earth from an imminent destruction (‘Apocalypse’) and always achieve the task successfully!

Whereas, there is overwhelming evidence of multiple failures of the US secret services. For example, they failed to prevent assassination of President Kennedy (1963); attack on WTC (2001); Capitol riots (2021); assassination attempt on Trump (2024). They also failed miserably in Vietnam, Cuba, Afghanistan, Palestine, Iraq, Pakistan, India, Maldives, Ukraine, etc. There are many instances of the US secret services or armed forces failing to prevent a major conflict or coup. In fact, the US is the only state to have used atomic weapon in the history of mankind.

·         A vast majority of US citizens truly believe in supremacy and superiority of their country?

Whereas the fact is that a significant proportion of the US population is unhealthy, unemployable, financially insecure, and indebted. The country is being basically pushed by brilliant immigrants, lured from developing countries, through attractive scholarships, and promises of liberty, equality, inclusion etc. Without the promise of DEI (Diversity, Equality, Inclusion), half their universities could become unviable, making higher education even more inaccessible for a large majority of the local population.

To joke, the US is the boy, who is a poor cricket player but owns the only bat available to the team. He is entitled to play as the captain.

The short point is that the programs like USAID (mostly a disguise to bribe foreign governments and think tanks enjoying significant influence on their respective governments), DEI, NATO financing, birthright citizenship, generous contributions towards the IMF, UN and Red Cross etc., have earned the US a wider acceptability. The world has ignored all its misadventures, atrocities, and exploitations including Vietnam, Afghanistan, and Iraq.

If President Trump and his advisors want to end these programs, throw out cheap labor and brilliant students, weaken USD, alienate trusted and old-time allies like Canada & Germany, push the allies like India away and closer to the opposite camp (Russia and China), and risk the presence and security of the US resources scattered all across the world they ought to have a full proof plan that is still not known to us.

Who knows, maybe they are just testing the waters by bluffing the world and do not intend to carry out much of their threats. Maybe they would tactically unroll most of their actions taken in the past two months, changing the nomenclatures of programs like USAID.

Notwithstanding, one thing is very clear that the US economy is weakening and MAGA is a much longer project than Mr. Trump's presidential tenure. …more on this next week.