Rising US yields, Federal Reserve rate hikes, and expected tightening by the Reserve Bank of India have created a subdued outlook for equities following a weak September. Global factors, including oil prices, are currently overriding market sentiment.
“My expectation almost is irrespective of the kind of results that companies do announce, we will probably see some kind of a selling and a taking of some of the gains that have happened in some of the consumer discretionary and industrial manufacturing spaces,” Vijaykumar noted.
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Within the financial sector, mid- and smallcap public sector banks have benefited from positive announcements regarding capital raises and product launches, while private banks remain subdued.
However, recent leadership announcements in the private banking space offer potential catalysts over the next couple of quarters, as sentiment around these large lenders has bottomed out.
For non-banking financial companies (NBFCs), impending rate hikes present a medium-term risk to demand. The domestic rate cycle is not expected to move in lockstep with the US Federal Reserve, similar to the divergence seen between 2015 and 2018.
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Given India’s stable macroeconomic position and gross domestic product growth, the central bank is likely to implement a couple of rate hikes rather than a prolonged tightening cycle.
In the technology space, large IT services companies have yet to price in all negative factors. The sector continues to face subdued earnings growth and the impact of price declines in recently signed contracts, pushing any potential recovery in earnings and sentiment a couple of quarters down the line.Conversely, midcap IT firms that have taken concrete measures to integrate artificial intelligence (AI) offer some opportunities.
Pharmaceutical stocks have demonstrated resilience over the past year, supported by dollar-denominated earnings and exemptions for generics from additional US tariffs amid the implementation of the BioSecure Act. While decent earnings growth is anticipated in the near future, the sector is currently aggressively valued.
On the consumption front, early auto numbers appear unpromising, and a deficient monsoon threatens to dampen rural demand, keeping overall expectations for discretionary consumption stocks fairly muted.
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