R. Janakiraman, CIO – Franklin Equity
The global economic landscape continues to remain fraught with challenges and uncertainties. Trade policy uncertainty, particularly due to tariff hikes, is anticipated to adversely affect global trade and growth at both macro and micro levels, as companies delay capital expenditures in search of more clarity. Global GDP growth is expected to slow down due to increased trade barriers, heightened geopolitical and policy uncertainty. The IMF (International Monetary Fund) has downgraded its global growth forecasts by 50 basis points (bps) and 30 bps for 2025 and 2026, to 2.8% and 3%, respectively. The US economy is projected to grow at 1.8% in 2025, which is 90 bps lower than the baseline projection made in January 2025.
India's GDP growth forecast for FY26 has been revised from 6.5% to 6.2%. The market is likely to consolidate rather than continue with a momentum-driven, one-way trend, given the lack of clarity on the global front. Despite the impact of trade tensions on the growth outlook, India's relative growth remains higher supported by strong economic fundamentals.
On the currency front, the rupee's Real Effective Exchange Rate (REER) has corrected significantly, and India's proposed trade deal with the US should set it apart in the ongoing trade upheaval. Sluggish oil prices are beneficial for current account deficit (CAD), and corporate balance sheets are strong. The RBI has shifted from a tight regulatory environment in CY24 to a pro-growth stance with ample liquidity. This change is particularly beneficial for banks and non-banking financial companies (NBFCs), improving the overall lending environment and economic growth outlook.
4QFY25 Earnings are projected to be muted and in line with general expectations of mid single-digit growth. The financial sector's earnings have been in line with expectations while overall, earnings growth for FY25 has been tepid. Consensus projections forecast earnings growth of approximately 13% for FY26. Markets remain cautious about potential downgrades, similar to those experienced in FY25.
Key risks include global economic fragmentation and higher trade barriers. Due to the uncertain business environment, anticipated revival of the private capex cycle could be delayed, with companies waiting for more clarity. The supply of equity paper, if it continues at an elevated level, can impart a drag on equity returns.
The weak market performance in FY25 has largely bridged the gap between earnings growth and equity returns, particularly in large caps. So Large-cap valuations are relatively attractive, while mid and small-cap segments remain above their long-term averages. Overall, there is a cautious outlook on both global and domestic markets. Despite this, we continue to highlight the importance of equities as a long-term asset class.
Opportunities for investors
Considering the current global uncertainties, a diversified approach is advisable. Diversifying exposure across different market capitalizations and sectors can help manage risks and capture opportunities. Hybrid funds may offer optimal riskadjusted returns during uncertain times. This phase requires discipline and patience.
Source: Bloomberg, RBI, MOSPI, Morgan Stanley
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