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Informist, Monday, May 5, 2025

 

By Anjana Therese Antony

 

MUMBAI – While the 90-day pause on US tariffs and lack of major escalation in tension between India and Pakistan have eased the concerns of stock market players, experts say gains in domestic equities will be limited in the near term even though sentiment is now bullish. Among the headwinds that could limit the upside of the market are uncertainty about the next leg of US tariffs, particularly on China, a further slowdown in domestic earnings growth, and some near-term risks associated with geopolitical tension between India and Pakistan following the terrorist attack in Pahalgam.

 

All six research analysts Informist spoke to do not anticipate any major 'headaches' in terms of diplomatic relations between India and Pakistan. They also don't see tariff-related concerns worsening further as talks between the US and its key trading partners are expected to yield some positive results. Some analysts said risks were now predictable compared to a couple of months ago, though the odds of further shocks persist.

 

"It's too early to assume tariff-related shocks are completely behind us," Nirav Karkera, head of research at Fisdom, said. "Given the unpredictability of global trade policies, particularly from the US and China, fresh disruptions cannot be ruled out. A cautious optimism is warranted," he added. However, Karkera believes the Indian market has priced in many negatives and global risk appetite is slowly improving.

 

The benchmark Nifty 50 is likely to extend its northward journey for the third consecutive month in May, but at a slower pace than the 3.5% rise in April which came on top of 6.3% gains in March. Resistance for the Nifty 50 is seen at 24950 points, as per the median of estimates of eight broking firms. This is 2.5% higher than April's closing level, but still 5?low the 26277.35-point record high the index had hit on Sept. 27, 2024.

 

Support for the index is seen at 23800 points, according to the median of estimates. This is nearly 3% lower than Monday's closing level of 24461.10 points, but more than 9% higher than the 10-month low of 21743.65 points the index had hit on Apr. 7 which had breached the 22750-point support Informist had polled for April.

 

Despite the market's sharp correction till February, analysts say valuations are slightly stretched considering the expectations of a persisting slowdown in earnings growth. The recent correction has helped cool sentiment, but many stocks among mid- and small-caps have high multiples without earnings support, Karkera of Fisdom said, adding that broad-based rallies in this space might not sustain without delivery on earnings.

 

The sharp fall in global crude oil prices and the recovery in foreign investors' appetite for India are among some of the near-term relief factors for equity investors. Crude oil prices fell to around $58 per barrel Monday from the peak of $75 per barrel in April after the Organization of the Petroleum Exporting Countries and its allies announced they would increase crude oil output. This is the second increase in output in two months.

 

Foreign institutional investors were net buyers for 12 sessions in a row till Friday--the longest time they have net bought Indian shares since May 2023--and this has provided some relief for investors. Global investors net purchased shares worth more than INR 400 billion in these 12 sessions, eight times the nearly INR 50 billion bought during the same period a month ago. FIIs had aggressively dumped Indian equities between October and March due to multiple reasons, including worries about US tariffs, expensive valuations, a slowdown in domestic earnings growth, fears of a recession in the US, and anticipation of slower interest rate cuts by the US Federal Reserve.

 

US FED, TARIFFS

Investors now await the outcome of the US Federal Reserve's meeting on Wednesday and global markets widely expect the apex bank to keep key interest rates steady at 4.25-4.50% for the third time in a row. The Fed is expected to keep a rate cut in abeyance and wait for more clarity on the impact of new tariffs on the US economy, despite President Donald Trump's repeated threats to cut rates and comments that inflation is no longer a concern. According to the CME FedWatch Tool, there is a 96.8% possibility that the US Fed will leave rates steady this week.

 

Goldman Sachs expects the US apex bank to cut the federal funds rate by 25 basis points each in July, September, and October. The investment bank, like many other market participants, anticipates the US Fed will wait for clear signs about the US labour market's strength and inflation before reducing rates further. The Fed had started its rate cut cycle in September 2024 after 14 months of keeping rates at an over two-decade high. Since September, the apex bank has reduced interest rates by a total of 100 basis points across three cuts and has then kept them unchanged at the next two meetings.

 

The Fed has refrained from reducing rates due to mounting worries of a recession in the US due to the new tariffs. Multiple threats from Trump about sacking Fed Chair Jerome Powell have added to worries about the unpredictable policies of the US president, who has gone back and forth with the tariffs.

 

When asked about the possibility of Indian companies shifting manufacturing to the US, Karkera of Fisdom said some companies might explore shifting partial capacity to the US or other neutral geographies to mitigate long-term tariff risks. "However, the costs involved – land, compliance, labour, and logistics – are significantly higher and not feasible for all." While this could impact margins in the short run, the long-term benefit could be supply chain de-risking, Karkera said.

 

EARNINGS SLOWDOWN, SECTORAL VIEWS

The March quarter earnings have not shown any signs of respite from the slowdown in growth seen in the last couple of quarters. Analysts also expect earnings downgrades to continue following the results for the reporting quarter.

 

"My sense is that expectations on earnings growth... are 5% to 6% over the next 2-3 years," Dhananjay Sinha, co-head of equities and head of research at Systematix group, said. According to an Informist poll of 30 broking firms, the net profit growth of 47 companies in the Nifty 50 is expected to decline 5% on year in the March quarter. "If I consider that minus 5% (as per Informist poll), then just 2% or 2.5% (growth) in FY25," Sinha said, adding that the earnings outlook is a "bit risky".

 

However, earnings growth is likely to gain traction in the next two-three quarters, driven by falling input costs and a recovery in volume. "Normalisation to pre-disruption trends may take two-three more quarters, depending on macro stability and demand revival," Karkera of Fisdom said.

 

Many analysts are bullish on large-cap private banks as their asset quality and growth in loans as well as deposits have improved compared to two-three quarters ago. "Cement and capital goods are seeing demand recovery and margin expansion, while telecom benefits from rising ARPUs (average revenue per user)," Karkera said.

 

On the other hand, experts have reduced their positions on fast-moving consumer goods and information technology stocks. While high raw material prices and weakness in urban demand continue to drag down FMCG players, IT players are likely to feel pressure due to no major change in client budgets, risks associated with US tariffs, and the anticipation of muted revenue growth. Research analysts said mid- and small-cap indices have corrected faster than the large-cap Nifty 50.

 

INDIA-PAKISTAN WOES

Experts don't anticipate the ongoing tension between India and Pakistan to escalate. "Right now, it doesn't really matter...There can be some minor surgical actions or kinetic actions, but I don't think it will have a lasting effect," Sinha of Systematix group said.

 

Echoing this, Karkera of Fisdom said there could be near-term corrections in equities if the situation worsens. "Unless the conflict escalates into a prolonged geopolitical crisis, history suggests such dips are often short-lived and present buying opportunities for long-term investors."

 

Following are the support and resistance levels for the Nifty 50 index for May, based on responses from eight brokerages:

 

Broking firm	Support 1	Support 2	Resistance 1	Resistance 2
Axis Securities	24200	23700	24850	25250
Globe Capital Market	23800	23400	24800	25050
HDFC Securities	23900	--	25400	--
ICICI Securities	23800	23500	24500	25000
JM Financial Services	23800	--	24900	--
Religare Broking	23600	--	25200
Sharekhan	23800	--	25300	--
DBS Cholamandalam	23800	--	24500	24800
Median	23800		24950

 

End

 

With inputs from Team Informist

 

US$1 = INR 84.25

 

Edited by Avishek Dutta

 

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