R. Janakiraman, CIO – Franklin Equity
Many countries have yet to reach trade agreements with the United States and negotiations remain ongoing with deadlines getting extended in some cases. While the effects of tariffs are beginning to emerge, much of the impact is likely still not reflected in current economic data. Policy uncertainty remains elevated, and recent data releases from both the United States and Europe have generally been mixed. Policymakers continue to express concern about the potential negative effects of tariffs on economic growth and inflation. This could contribute to near-term market volatility.
The U.S. Dollar Index3 (USD DXY) extended its decline in June 2025, falling by 2.5%. Year-to-date, the index is down 10.7%. The passage of the One Big Beautiful Bill Act (OBBBA) in July 2025 marks a significant shift in U.S. fiscal policy. While the bill is intended to stimulate economic growth, it has sparked debate over fiscal sustainability and its potential to raise national debt by $2.4-$3 trillion over the next decade.
The current US trade policies might drive shifts in global trade. June's PMI data shows a manufacturing activity slowing in most export driven economies in Asia. While India is not immune to the global tariff and trade wars, its relatively low dependence on external trade and robust domestic demand provide a degree of insulation, helping it maintain a relatively low risk premium compared to other emerging markets. About 80% of Nifty 500 revenues are domestic and the USA accounts for just 5%. Although tensions in the Middle East may prove temporary, longer-term tariff issues could reshape global trade flows. In this context, India is strategically positioned to benefit from supply chain diversification, as global firms increasingly seek alternatives to China and Vietnam.
India's cyclical recovery is gaining momentum, led by a strengthening investment cycle. Corporate capital expenditure is trending positively, though actual outlays may be more conservative than market forecasts. Consumer discretionary demand, which softened after the post-COVID surge, is poised for a rebound. Recent fiscal and monetary stimulus - via tax relief, lower borrowing costs, higher liquidity with banks and improved credit access - might support a recovery during the second half of fiscal year 2026.
RBI's rate cuts and liquidity measures might encourage higher risk appetite across sectors. With no significant asset quality issues in the banking system and corporates operating with low leverage, the economy is expected to be well-positioned for growth. However, while macro conditions remain favorable, elevated valuations and increased equity issuances could act as headwinds in the near term.
A key risk to equity market performance in 2025 is the continued surge in supply, driven by IPOs, qualified institutional placements (QIPs), and promoter sell-downs - a trend that was seen in late 2024 as well and which contributed to market weakness then. In addition, broader macro risks such as sluggish wage growth, persistent geopolitical tensions and global uncertainty continue to weigh on consumer sentiment and investor confidence.
The Nifty 50 index is currently trading at approximately 21 times one-year forward earnings. Over the past six months, a decline in interest rates - with yields now 50 basis points lower - has made these valuations relatively more palatable compared to September 2024, even though valuation levels remain similar. This shift is reflected in the improved yield spread, defined as the difference between earnings yield and bond yield, which now appears more supportive of equity valuations.
Considering these factors, equity returns are expected to closely track earnings growth. With earnings growth for Nifty 50 projected to accelerate to around 10-12% in FY 2026, and given the market's fully valued status, future returns might be driven primarily by fundamental earnings growth rather than valuation re-rating.
Opportunities for investors
Investing is a long-term game with patience being your greatest ally. Through to the end of June, the Nifty 500 is up less than 5% y-o-y in what has been a volatile year. A systematic and diversified approach to investing reduces emotional biases, spreads risk and smoothens returns. Exposure across asset classes, sectors and market capitalizations might help balance risk and reward. In this context, hybrid funds like multi asset allocation funds and balanced advantage funds may be considered as investment options which aims for optimal risk-adjusted returns, offering a blend of relative stability and growth potential.
3 The U.S. Dollar Index is an index of the value of the US dollar relative to a basket of six major foreign currencies
Source: Bloomberg, RBI, MOSPI, Morgan Stanley, Congressional Budget Office (CBO)
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