He highlights the rising possibility of a 50 basis points rate cut by the RBI in 2025, as inflation remains under control and the need to support growth becomes more pressing.
From his views on global volatility triggered by tariff tensions and US bond yields, to India’s improving earnings landscape and growing IPO activity, Dr. Thomas outlines where opportunities lie for long-term investors and which sectors deserve close attention now. Edited Excerpts –
Q) What is fuelling volatility on D-Street – tariff war fears still playing the spoilsport?
A) We have witnessed unusually high levels of volatility in the last three to four months. The sell off by FIIs, as it gradually moderated, the Trump tariffs made the entry creating unprecedented uncertainties in global trade and the sustainability of the economic momentum that was picking up in Europe and elsewhere in the world.
From a domestic perspective, the Indo-Pak conflict also contributed to some amount of volatility though it was short-lived. The actual impact on the secular uptrend of the markets is concerned, these events would have had very little enduring impact on the domestic economy and markets.
The US seems to be in a conciliatory mode as of now with negotiations in progress with several countries. As far as India is concerned the bilateral trade agreement with the US is at an advanced stage of negotiations and could be finalized soon. However, the Russia-Ukraine conflict is still alive, and it is difficult to see how it is going to progress in the coming days.Therefore, we may see volatility continuing to envelop the markets but the intensity is likely to moderate substantially. Q) What does rise in US Bond Yields mean for Indian markets? Historically, a rise in bond yields could trigger a rotation out of equities into bonds. Additionally, rising US yields can lead to capital outflows from emerging markets as investors seek safer returns in US bonds. How are you reading into this?
A) US bond yields do not mean anything much for Indian markets as things stand at this juncture. The US bond yields moved up in response to two factors – the downgrade by Moody’s, and the pause on rate cuts by the Fed.
The US rates are bound to come down over the next three to six months. Over the next one year or so, the Fed Funds Rate could come down by another 200 basis points with the rate of economic growth showing a deceleration, and a further slowdown in growth in the coming quarters, and with inflation too very close to the target rate.
Considerations of growth will compel the Fed to cut rates further. With further fall in US interest rates, there is likely a flow of funds into emerging markets, and this requires rate action by the Fed. Asset rotation is a possibility only where rates have peaked or near-peak.
The conditions in the US or India is still an evolving one with rates having come down the peaks and set to move still lower.
With far higher government expenditure on the anvil, any frenzied buying in the US treasuries can be ruled out especially with a lower rating by another agency, and far more supplies expected at the primary in the coming months.
Q) What do you make of the March quarter results from India Inc.?
A) The Q4- FY25 results are more or less in line with expectations. Broadly, going by BSE-500 results, the PAT growth was, on a y-o-y basis, to the tune of 8.70%.
The sectors which displayed improvements sequentially are Healthcare, Materials and industrials, and those who did not measure up included IT and Consumer Discretionary.
Strong underlying cash flows, and significant step up in EBITDA over the last couple of years for BSE 500 companies marks a fundamental robustness.
With valuations at reasonable levels, and likelihood of much lower cost of funds, and liquidity sustaining over a longer period of time, the indexes may pick up further momentum, with the only threat being the acceleration of the tariff related uncertainties.
Q) FOMC minutes indicated that further rate cuts could be data dependent. But what about rate cuts back home? How do you see rates moving?
A) As I mentioned earlier, there will be more rate cuts in the US as we progress further in this year. With the last CPI number at 2.30 %, inflation is close to the Fed’s target rate.
The need to prop up growth through lower rates would emerge sooner than later. Back home the RBI has so far effected two rate cuts which has taken the Repo rate to 6.00 %.
The probability of rate cuts is very high as the cost of funds needs to be brought down to support economic growth. Inflation is under control, and the threats from food or fuel component is very limited or nil.
Mainly, the crude prices are very low and the OPEX+ expansion of output and supply to the tune of 410,000 barrels per day would act as a dampener on prices. On a very conservative assessment the rate cuts from the RBI could be at least 50 basis points for the rest of the year.
The market yields are already pricing-in this to a large extent. The fall in rates and the liquidity which is aplenty in the interbank market helps the transmission of rates deeper into the credit realm.
The GOI 10 Year benchmark has already touched 6.20 %, and the fall from these levels would be more gradualistic, while the short-term rates may display relatively greater intensity of fall. The liquidity and interest rate scenario supports both higher equity and debt markets.
Q) We are seeing some activity in the IPO markets. What do you make of the companies that are getting listed – any interesting names? What about SME space, which has gathered more interest so far in 2025 as compared to mainboard IPOs? Do you see froth building in this space or an opportunity for long-term investors?
A) The IPO market for both mainboard and the SME space saw good number of new issues during last calendar year. In the year 2024, India reached the number one position internationally in IPO volumes, and in India twice as many IPOs as the US, and almost two-and-a-half times as many as Europe, were listed.
More or less the same pace is seen early on in this year too. The number of SME issues was larger than the number of the mainboard issues. These issues come up when the outlook for the markets is positive, when the market liquidity is smooth, and also the perception on gains post the listing is quite substantial.
At this juncture conditions are conducive to a revival of interest in IPOs in both the segments. The pre-IPO activity, mainly in the popular unlisted space is also gradually picking up steam.
What has been supporting the IPOs is a very strong interest by retail investor in this space, apart from interest from overseas investors. Also, IPOs almost always create an impression of something that is cheaper than the market which is reflected in the oversubscription in majority of the issues.
Q) Where do you find value in this market for long-term investors?
A) The Mid and Small Caps segment (SMIDs)offers better value to the portfolio on a longer-term basis. This is because of two reasons. After the corrective downward movements seen in the last three to four months, the valuations are now at reasonable levels.
The segment offers better growth and therefore, better price performance. Yat another factor to reckon with is that the market capitalization of the SMIDs has expanded over the last couple of years, and this makes it a favoured destination for overseas investors.
This is something that should not be missed from a long-term perspective. Apart from these two themes which Emkay Wealth has been highlighting is the Infra and PSU equity.
There has been significant correction in these two segments, and they offer immense amount of value for investors as their performance is linked to developmental efforts and government policies and not that much correlated to economic cycles. The other sectors which Emkay is positive on are consumer discretionary, healthcare, technology, and utilities.
Q) What is your call on the defence space? Many stocks witnessed a double-digit jump after geopolitical tensions between India and Pakistan earlier this month.
A) The defence space looks lucrative against the background of the military operations which actually highlighted the strategic shift in the modes, mechanism and techniques of warfare.
The use of drones unmanned aerial vehicles, and the use of satellite technology to hit targets with precision has lent great credibility to a host of defence manufacturing entities and their capabilities which have now been established.
However, it may be mentioned here that the listed entities may be far and few, but the number of entities who are in the unlisted space and who would be coming up in the near future would be much, much, higher than what we have in the listed space.
It may be worthwhile looking at private equity funds focussed on early or mid-stage startups which are available in the marketplace. At a portfolio level, one should be careful about avoiding any kind of overexposure to the sector.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
